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entitled 'The Accounting Profession: Status of Panel on Audit
Effectiveness Recommendations to Enhance the Self-Regulatory System'
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United States General Accounting Office:
GAO:
Report to the Ranking Minority Member, Committee on Energy and Commerce,
House of Representatives.
May 2002:
The Accounting Profession:
Status of Panel on Audit Effectiveness Recommendations to Enhance the
Self-Regulatory System:
GAO-02-411:
Contents:
Letter:
Results in Brief:
Background:
Objectives, Scope, and Methodology:
POB’s Oversight Authority, Independence, and Leadership Role:
Peer Review Program:
Accounting Profession’s Disciplinary Process:
Observations:
Agency Comments and Our Evaluation:
Appendixes:
Appendix I: POB Charter Provisions Responding to the Panel on Audit
Effectiveness’ Recommendations:
Appendix II: Actions Responding to Panel on Audit Effectivesness’
Recommendations:
Appendix III: Comments From the Public Oversight Board:
Appendix IV: Comments From the American Institute of Certified Public
Accountants:
Appendix V: Comments From the National Association of State Boards of
Accountancy:
Appendix VI: Accounting Profession: Oversight, Auditor Independence,
and Financial Reporting Issues:
Abbreviations:
AAER: Accounting and Auditing Enforcement Release:
AICPA: American Institute of Certified Public Accountants:
ASB: Auditing Standards Board:
CART: Committee Appointed Review Team:
CPA: Certified Public Accountant:
FAF: Financial Accounting Foundation:
FASB: Financial Accounting Standards Board:
GAAP: generally accepted accounting principles:
GAAS: generally accepted auditing standards:
ISB: Independence Standards Board:
NASBA: National Association of State Boards of Accountancy:
PEEC: Professional Ethics Executive Committee:
PITF: Professional Issues Task Force:
POB: Public Oversight Board:
PRC: Peer Review Committee:
QCIC: Quality Control Inquiry Committee:
SEC: Securities and Exchange Commission:
SECPS: SEC Practice Section:
SOM: Summary Observation Memorandum:
SQCS: Statements on Quality Control Standards:
[End of section]
Comptroller General of the United States:
United States General Accounting Office:
Washington, D.C. 20548:
May 17, 2002:
The Honorable John D. Dingell:
Ranking Minority Member:
Committee on Energy and Commerce:
House of Representatives:
Dear Mr. Dingell:
This report responds to your request concerning the status of
recommendations made by the Panel on Audit Effectiveness[Footnote 1]
(Panel) to enhance the accounting profession’s self-regulatory system.
The accounting profession maintains a voluntary, self-regulatory system
through the American Institute of Certified Public Accountants (AICPA)
that includes establishing professional standards, monitoring compliance
with professional standards, disciplining members for improper acts and
substandard performance, and conducting oversight of the system. You
expressed concern about the effectiveness of the self-regulatory system
and whether the Panel’s recommendations would be implemented fully.
Specifically, you requested that we (1) determine the status of the
Panel’s recommendations to address limitations of the self-regulatory
system, and (2) identify any gaps in actions taken to implement the
Panel’s recommendations and their likely impact on overcoming the
limitations of the self-regulatory system identified by the Panel.
The sudden failure of Enron Corporation, one of the nation’s largest
corporations, has, among other things, led to severe criticism of
virtually all areas of the nation’s financial reporting and auditing
systems, which are fundamental to maintaining investor confidence in
our capital markets. These areas include corporate governance,
accounting standards and financial reporting, auditing, and regulation
of the accounting profession and were beyond the scope of the Panel’s
study. Accordingly, proposals to overhaul or, in some cases, replace
the current self-regulatory system will benefit by consideration of
proposals to improve the effectiveness of controls in these other
areas. These interrelated areas should be addressed in a comprehensive
and integrated manner, and any actions taken should be guided by the
fundamental principles of having the right incentives for the key
parties to do the right thing, adequate transparency to provide
reasonable assurance that the right thing will be done, and full
accountability if the right thing is not done. Further, the components
in the regulatory and corporate governance systems must proactively
assess risks within the system that inhibit effectively protecting the
public interest.
It is important to recognize that the Panel’s study and recommendations
were directed at enhancing the accounting profession’s then-current
self-regulatory system and, therefore, did not address alternative
models of governing the accounting profession, the current financial
reporting model, or various corporate governance issues.
On January 17, 2002, the Chairman of the Securities and Exchange
Commission (SEC) outlined a proposed new regulatory structure to
oversee the accounting profession. The SEC’s proposal provided for
creating an oversight body that would include monitoring and discipline
functions, have a majority of public members, and be funded through
private sources, although no further details were announced.[Footnote
2] The existing oversight body, the Public Oversight Board (POB), was
critical of the SEC’s proposal and stated that it was not consulted
about the proposal that the SEC evidently developed in consultation
with the AICPA and the five largest accounting firms. On January 20,
2002, the POB passed a resolution of intent to terminate its existence
no later than March 31, 2002.[Footnote 3] In that respect, the SEC
announced on March 19, 2002, that a Transition Oversight Staff, led by
the POB’s executive director, will carry out oversight functions of the
POB, including monitoring the status of implementing the Panel’s
recommendations.[Footnote 4] However, on April 2, 2002, the POB members
voted to extend the POB through April 30, 2002,[Footnote 5] to provide
additional time solely to finalize certain POB administrative matters,
including preparing a letter concerning transitioning for monitoring
the implementation of the Panel’s recommendations, and to facilitate a
more orderly transition.
Although the POB has terminated its existence, the Panel’s findings
regarding limitations of the self-regulatory system and the status of
actions to address those limitations should be instructive in not only
considering the SEC’s proposal, but other proposals that may result
from the many Enron related inquires. Accordingly, as you requested, we
are reporting on the status of the Panel’s recommendations related to
the accounting profession’s current self-regulatory system.
Regarding the broad range of issues highlighted through the Enron
failure, we have recently issued other products to assist the Congress.
We held a forum on corporate governance, transparency, and
accountability in February 2002 to discuss the effectiveness of the
systems of regulatory control as well as other related areas such as
pensions.[Footnote 6] Also, we testified before the Congress to further
elaborate on these issues, including considering alternatives to the
current self-regulatory system of the accounting profession.[Footnote
7] In addition, we issued significant changes to the auditor
independence requirements under Government Auditing Standards, which
apply to audits of federal entities and funds.[Footnote 8] While the
new standard deals with a range of auditor independence issues, the most
significant change relates to the rules associated with nonaudit or
consulting services provided to clients. These revisions were considered
for several years, as auditor independence has been a longstanding
concern, and were not a response specifically to address the various
auditor independence issues raised by the Enron failure. On May 3,
2002, at the request of the Chairman of the Senate Committee on
Banking, Housing, and Urban Affairs, we submitted for the record our
views regarding what steps the Congress should consider taking to
strengthen oversight of the accounting profession, auditor
independence, and selected financial reporting matters. The letter
containing our views is included as appendix VI to this report.
Results in Brief:
The Panel’s recommendations were made within the context of the existing
self-regulatory system of the accounting profession. Implementing
actions taken or in process have addressed many of the Panel’s
recommendations. However, the Panel’s recommendations did not fully
address the limitations of the self-regulatory system which the Panel
identified in its report. Also, some of the Panel’s recommendations
were either not accepted or are still under study. Additional
experience is needed to evaluate the effectiveness of actions taken or
planned; however, the overarching issues of a system that is
fragmented, is not well coordinated, and has a disciplinary function
that is widely perceived to be ineffective continue to exist.
The POB’s authority was extended to oversight of auditing standards as
recommended by the Panel, but gaps remained in the authority of the POB
regarding oversight of setting auditor independence rules and
disciplining members of the accounting profession. In addition, in
contrast to the Panel’s recommendation that the POB have sole authority
to determine its budget and financial and other resources, and that the
accounting profession be obliged to provide those resources, the POB’s
budget was capped at $5.2 million. Having a budget cap in the POB’s
charter could be perceived as a limitation of the accounting profession’
s support for effective oversight and could have delayed or otherwise
hindered the operations of the POB. In response to the Panel’s
recommendations to improve communications, the POB established a
coordinating task force within the self-regulatory system. However,
with regard to the public regulatory systems (the SEC and the state
boards of accountancy), no substantial actions were taken to improve
communications. The SEC’s January 17, 2002, announcement of a proposed
new regulatory body without consulting with the POB demonstrates the
continuing lack of effective communications as reported by the Panel,
to jointly work together to protect the public interest.
Changes proposed by the Panel to the peer review program, which is the
keystone of the present self-regulatory system, so that the program has
a more risk-oriented approach for all firms and, in addition,
continuous peer review and oversight of the large firms, have been
tested by the AICPA. Implementation is planned for the 2002 peer review
cycle. Further, the AICPA is considering other changes to the peer
review standards, as recommended by the Panel. The AICPA, however, did
not accept the Panel’s recommendation to have the POB considered as the
client of the peer reviews. Consistent with the Panel’s intentions, the
POB’s successor needs to have early involvement with draft peer review
reports to ensure that root causes of problems are identified and
effectively addressed and reported.
The self-regulatory system lacks the power to protect the
confidentiality of investigative information regarding alleged audit
failures or other disciplinary matters concerning members of the
accounting profession. As the Panel reported, the lack of such
protective power hinders the timing of investigations, which affects
the public’s perception of the self-regulatory system’s effectiveness.
The Panel recognized the need for legislation to address this issue,
but given the uncertainty of obtaining it, the Panel recommended other
actions, which the AICPA has taken, to protect the public interest when
public accounting firms or their members overseen by the POB are named
in litigation alleging an audit failure.
The Panel also reported that the public’s perception of the self-
regulatory system’s effectiveness is affected by the need for improved
transparency of disciplinary actions that have been taken. In response
to the Panel’s finding, a task force within the self-regulatory system
has been formed to explore more informed reporting of disciplinary
activities. The effectiveness of disciplinary actions, as reported by
the Panel, remains an open issue.
We provided for comment a draft of this report to officials of the POB,
the AICPA, the SEC, and the National Association of State Boards of
Accountancy (NASBA), as well as to the Chair of the Panel on Audit
Effectiveness. The comments we received were generally technical in
nature and were considered as appropriate throughout the report.
Background:
The Panel on Audit Effectiveness, a “Blue Ribbon Panel,”[Footnote 9]
was formed by the POB in response to a September 28, 1998, request from
the SEC for an evaluation of whether recent changes in the audit
process serve to protect the interest of investors. The SEC stated that
the combination of changes in the audit process and high profile
financial frauds have raised questions about the efficacy of the audit
process. Accordingly, the Panel was formed to conduct a comprehensive
review and evaluation of the way independent audits are performed and
to assess the effects of recent trends in auditing on the public
interest. The Panel’s study included assessing the accounting
profession’s self-regulatory system. The Panel’s study also addressed
issues related to the interface of the accounting profession’s self-
regulatory system with the SEC and the state boards of accountancy (the
public regulatory systems). Our work, as requested by the Ranking
Minority Member, House Committee on Energy and Commerce, was directed
at the status of the Panel’s recommendations addressing the accounting
profession’s current governance system (the self-regulatory system and
the public regulatory system).
The Panel’s report stated that although the goals of self-regulation and
public regulation are similar, that is, protecting the public interest,
and that the two systems are intended to operate in concert with one
another, there are important differences:
Public regulation is conducted with the full power of the state in
support of established requirements. Self-regulation has no equivalent
authority. At most, it can exclude noncomplying members from whatever
benefits group membership confers or impose whatever sanctions members
have voluntarily agreed to accept. Such powers as the ability to
subpoena records and witnesses are not available in self-regulation.
[Footnote 10]
Self-Regulatory System:
At the time of the Panel’s study, the self-regulatory system included
the AICPA’s SEC Practice Section (SECPS), principally devoted to
monitoring the profession’s compliance with membership requirements and
standards. The SECPS’s subcomponents included the SECPS Executive
Committee, the Peer Review Committee (PRC), the Quality Control Inquiry
Committee (QCIC), the SEC Regulations Committee, and the Professional
Issues Task Force. The SECPS was overseen by the POB. In addition, the
accounting profession’s self-regulatory system included standards-
setting activities carried out by the Auditing Standards Board (ASB),
the Independence Standards Board (ISB), and the AICPA’s Ethics
Division’s Professional Ethics Executive Committee (PEEC), which also
performed disciplinary activities.
The SECPS was administratively created by the AICPA in 1977, in
consultation with the SEC, and required member public accounting firms
to subject their professional practices to peer review and oversight by
the POB and the SEC. AICPA membership requires that members who provide
attest services to an SEC client be employed by or affiliated with a
public accounting firm that is an SECPS member. Within the SECPS, the:
* SECPS Executive Committee responsibilities include establishing
membership requirements, budget and dues requirements, determining
sanctions for noncompliance with membership requirements, and
appointing persons to its other committees and task forces.
* PRC oversees all aspects of the peer review program (audit firms
review other firms’ quality control systems for compliance with
standards and membership requirements) and imposes corrective measures
when deficiencies are found.
* QCIC conducts investigations of alleged audit failures involving SEC
clients arising from litigation or regulatory investigations, including
criminal indictments. The QCIC’s investigation is focused on whether
the member firm has deficiencies in its system of quality control or its
compliance with the system, or whether there are deficiencies in
professional standards relevant to matters in the case. The QCIC does
not determine guilt related to the litigation of the subject firm. It
does impose corrective measures related to its objectives and, where
members may have violated professional standards, refers the cases to
the Ethics Division for investigation and possible disciplinary action.
* SEC Regulations Committee acts as the primary liaison between the
accounting profession and the SEC on technical matters relating to SEC
rules and regulations.
* Professional Issues Task Force accumulates and considers practice
issues that present potential audit concerns for practitioners and
disseminates information addressing those concerns, including referrals
to the profession’s standard-setting bodies.
The SECPS’s committees and task force are composed of volunteers, all of
whom are certified public accountants and members of the AICPA.
The POB was formed simultaneously with the SECPS by the AICPA, in
consultation with the SEC, to oversee the SECPS and represent the public
interest on all matters that may affect public confidence in the
integrity of the audit process. At the time of our study, the POB was
comprised of five public members with a broad spectrum of business,
professional, regulatory, and legislative experience that represents
the public interest. SECPS member dues funded the POB and the SECPS.
Based on the Panel’s recommendations, the POB received enhanced
oversight authority within the self-regulatory system that will be
discussed later in this report. As discussed earlier in the report, the
POB terminated on May 1, 2002.
The AICPA established the ASB to promulgate generally accepted auditing
standards (GAAS), that are followed by independent auditors of financial
statements, and to promulgate related standards governing attest
services. The ASB also issues quality control standards that must be
followed by AICPA member firms for their internal quality control
system. The ASB consists of 15 members, with representatives from audit
firms, academia, and government, that are approved by the AICPA Board
of Directors.
The ISB was created in 1997 through an agreement between the SEC and
the AICPA to, among other activities, develop auditor independence rules
for auditors of SEC registrants. The ISB consisted of four public
members and four members from the auditing profession. The ISB was
terminated in 2001, which will be later discussed.
The AICPA’s Ethics Division, through its PEEC, is responsible for
setting auditor independence rules for all members of the AICPA and
determining compliance with the independence rules and auditing
standards when allegations of noncompliance are reported or otherwise
brought to the PEEC’s attention. The PEEC consists of 16 members from
all areas of practice (public accounting, private industry, and
government) and 5 public members (academia and the legal profession).
Public Regulatory System:
The SEC, through its responsibilities for administering and enforcing
the federal securities laws, is the primary federal agency involved in
accounting and auditing requirements for publicly traded companies. The
SEC has accepted accounting rules set by the Financial Accounting
Standards Board[Footnote 11] (FASB)—generally accepted accounting
principles (GAAP)—as the primary standards for preparation of financial
statements. The SEC has accepted rules promulgated by the ASB—GAAS—as
the standards for independent audits. The stock exchanges, which are
self-regulatory organizations approved by the SEC under the Securities
Exchange Act of 1934, establish accounting and auditing regulations for
listed companies, including requiring published annual reports
containing financial statements prepared in accordance with GAAP and
audited by independent public accountants. The SEC reviews and comments
on registrant filings and issues interpretive guidance and staff
accounting bulletins on accounting and auditing matters. The SEC
oversees the peer review program administered by the SECPS by reviewing
the POB’s oversight of the program, selecting certain peer review
workpapers for review, and reviewing the QCIC’s summaries of closed
cases.
State boards of accountancy, established by statute, regulate the
practice of public accountancy within their jurisdictions. State boards
have adopted rules of professional conduct, including compliance with
auditing standards, and can take disciplinary action against licensees
who violate these rules or standards. The individual state boards grant
CPA licenses to practice, and they are the only agencies that can
revoke them.
The Panel reported in August 2000 that the accounting profession’s self-
regulatory system, while extensive, suffered from various limitations,
including:
* lack of sufficient public representation on the various self-
regulatory bodies,
* lack of unified leadership of the various self-regulatory bodies,
* constraints on effective communications with the SEC and among the
various components of the self-regulatory system,
* differing interests and divergent views of the AICPA’s priorities on
the part of its diverse membership, and,
* a disciplinary system that is perceived to be slow and ineffective.
The Panel believed that many of the limitations of the self-regulatory
system could be mitigated by building on the POB’s experience and
reputation and by giving it increased authority and resources. The
Panel’s recommendations were directed at (1) enhancing the POB’s
independence and expanding its oversight authority and resources, (2)
improving communication within the self-regulatory system and with the
SEC and the state boards of accountancy (the public regulatory systems)
through POB leadership, (3) improving the accounting profession’s peer
review program and the POB’s oversight of that program, and (4)
providing more timely remedies to protect the public interest when
legal or regulatory actions allege audit failures.
Objectives, Scope, and Methodology:
Our objectives were to:
* determine the status of the actions taken in response to the
recommendations to address the limitations of the accounting profession’
s self-regulatory system contained in chapter 6, “Governance of the
Auditing Profession,” of the Panel on Audit Effectiveness’ August
31, 2000, report; and;
* identify any gaps in actions taken to implement the Panel’s
recommendations and their likely impact on overcoming the limitations
of the current self-regulatory system as identified by the Panel.
To determine the status of the actions taken to address the Panel’s
recommendations, we obtained an understanding of the various
components of the accounting profession’s governance system, their
functions and responsibilities, their resources, and the interfaces
among components, both at the time the Panel issued its report and
after actions had begun to implement the Panel’s recommendations. We
arranged separate interviews with senior representatives from each
system component to discuss their views regarding the Panel’s findings
and the limitations identified in the Panel report, their agreement
with recommendations contained in the report, any limitations of the
effective execution of actions taken or planned, and their opinions on
the likely effectiveness of these actions in response to the
recommendations. For actions in process, we discussed timeframes for
implementation and any possible issues to be resolved to implement the
recommendations.
We also met with the former SEC Chief Accountant serving at the time of
the Panel’s report and NASBA representatives to discuss the Panel’s
recommendations either addressed to them or related to their
responsibilities.
We conducted our review from June 2001 through April 2002 in accordance
with generally accepted government auditing standards. We provided for
comment a draft of this report to officials of the POB, the AICPA, the
SEC, and the NASBA, as well as to the Chair of the Panel on Audit
Effectiveness. The comments we received were generally technical in
nature and were considered as appropriate throughout the report.
We discussed our observations included in this report with senior
representatives of the various entities and incorporated their comments
in this report as appropriate.
The following sections discuss substantially all of the Panel’s
findings and recommendations, identify those areas of the self-
regulatory system where actions to address the Panel’s recommendations
were either not taken, did not fully address the recommendations, or
are incomplete, and provide our observations where further actions are
needed to address the Panel’s recommendations. See appendix I for the
complete status of the Panel’s recommendations affecting the provisions
of the POB’s charter and appendix II for the complete status of the
Panel’s other recommendations for improving the self-regulatory system.
Appendixes III, IV, and V contain comment letters from the POB, the
AICPA, and the NASBA, respectively. Appendix VI contains our May 3,
2002, letter to the Chairman of the Senate Committee on Banking,
Housing, and Urban Affairs regarding what steps the Congress should
consider taking to strengthen oversight of the accounting profession,
auditor independence, and selected financial reporting matters.
POB’s Oversight Authority, Independence, and Leadership Role:
In the mid-1970s, reports of U.S. companies paying bribes to foreign
officials and several highly publicized corporate bankruptcies resulted
in congressional hearings over these matters and the role of independent
auditors. A central focus of the hearings was whether additional
regulation of public accountants was necessary or whether the system of
self-regulation was sufficient. In response, in 1977 the AICPA, in
consultation with the SEC, created the SECPS,[Footnote 12] mandatory
peer review to check compliance with standards, and the POB to conduct
oversight of the SECPS. The POB did not have a formal charter but
instead operated under the SECPS’s Organization Document and its own
bylaws.
A central focus of the Panel’s recommendations was for the POB, the
AICPA, the SECPS, and the SEC to work together on a charter for the POB
that would commit all parties to an expanded POB oversight role and
system of self-regulation as recommended by the Panel. On February 9,
2001, the AICPA Board of Directors approved a charter for the POB that,
in all material respects, incorporated the POB’s Bylaws and the SECPS’s
Organization Document provisions pertaining to the POB.
In addition to incorporating the previous oversight authority of the POB
and its operating practices, the POB charter provided the POB with new
authority related to overseeing the setting of auditing and independence
standards, conducting special reviews of the profession, establishing
activities to improve communication within the self-regulatory system
and with the public regulatory systems through POB leadership,
evaluating the effectiveness of the self-regulatory components overseen
by the POB and the effectiveness of the POB, and strengthening POB
membership requirements.
While actions were taken to implement many of the Panel’s
recommendations, the overarching problems of a system that is
fragmented and not well coordinated continue to exist. Further,
significant gaps remain in the POB’s oversight authority, funding
limitations exist, and communications problems continue.
POB’s Oversight Authority:
Prior to the Panel’s report, the POB’s oversight authority was limited
to the SECPS, including oversight of peer review of members of the
SECPS and the QCIC’s activities. The Panel recommended extending the
POB’s oversight authority to the ASB, the ISB, and the auditor
independence standard-setting activities of the PEEC that relate to
audits of public companies. The POB received oversight authority over
the ASB and the ISB, but did not get oversight authority over the PEEC’
s auditor independence standard-setting activities with respect to
public companies. Notwithstanding the responsibilities of the ISB, in
November 2000, the SEC issued auditor independence rules for auditors
of SEC registrants. The former SEC Chief Accountant, who served in that
position when the SEC’s auditor independence rules were issued, stated
that the SEC was dissatisfied with the progress of the ISB and,
therefore, issued the rules itself. Subsequently, on July 17, 2001, the
SEC and the AICPA agreed that the ISB would be terminated and the SEC
would resume responsibility for setting auditor independence rules for
auditors of SEC registrants. With the SEC assuming auditor independence
responsibilities and the POB not having received any oversight
authority over the PEEC’s independence standard-setting activities, the
POB was left with no oversight authority over the setting of auditor
independence rules—exactly where it was before the Panel’s
recommendations.
The PEEC Chairman stated that since the SEC sets auditor independence
rules for auditors of SEC registrants, the independence rules set by the
PEEC essentially govern those members of the AICPA who do not audit
SEC registrants. Therefore, the PEEC Chairman believes the auditor
independence standard-setting activities of the PEEC are outside the
basic authority of the POB, which was limited to oversight of SECPS
member firms. Further, the PEEC Chairman believes that POB oversight was
unnecessary because the PEEC added five public members who can serve
to protect the public interest. However, SEC officials told us it might
consider independence standards established by the PEEC in reaching a
decision on an issue that is not covered by the SEC’s rules.
As will be discussed later, the Panel identified significant
limitations of the self-regulatory disciplinary function, recommended
measures to protect the public interest following a legal or regulatory
action alleging an audit failure, but did not address in its report
whether the POB should have authority over the AICPA’s Ethics Division’
s disciplinary activities. The Panel advised us that they viewed
disciplinary actions against SECPS members as primarily a function of
the SEC and the courts. The PEEC Chairman, whose committee is part of
the AICPA’s Ethics Division and is responsible for investigating and
disciplining members of the AICPA concerning violations of standards,
stated that its cases involving SECPS members are a relatively small
percentage of its total cases and that having public members on the
PEEC adequately protects the public interest without POB oversight.
The Panel recommended that the professional staff of the SECPS, the ASB,
and the PEEC remain employees of the AICPA. The Panel advised us that
consideration was given to whether the functions of these components of
the self-regulatory system should be under the POB, which would be
similar to the United Kingdom model for regulation of the auditing
profession, but at that time the United Kingdom model was relatively new
and not fully operational. Also, the Panel stated that concerns were
raised about whether having these functions under the control of the
POB would be in conflict with the POB’s oversight role. Therefore, the
Panel recommended that no changes be made.
The Panel was concerned that the differing interests and divergent
views of the AICPA’s priorities on the part of its diverse members
could affect the resources of the components of the self-regulatory
system. Therefore, the Panel recommended that the POB should oversee
the AICPA’s evaluation, compensation, hiring, and promotion decisions
with respect to its employees who constitute the ASB and SECPS staffs.
The AICPA did not accept this recommendation, as it believed human
resource decisions are management functions and would be in conflict
with the POB’s oversight role. However, the POB under its charter is
responsible for overseeing the adequacy of the ASB’s and SECPS’s
resources. Further, the POB believed that if staffing issues were to
arise, its oversight activities would have put it in a position to
raise the problem for resolution.
The Panel recommended that (1) the POB approve appointments to the
ASB, the SECPS Executive Committee, and the ISB, and that (2) the SECPS
Executive Committee retain responsibility for approving appointments to
the various SECPS committees that report to it, namely the PRC, the
QCIC, the SEC Regulations Committee, and the Professional Issues Task
Force. The AICPA accepted the latter recommendation but did not accept
the former recommendation. The POB’s charter provides that the POB
shall be consulted on appointments of members to the ASB and the SECPS
Executive Committee, and that its concurrence on the chair of the ASB
and the SECPS Executive Committee should not be unreasonably withheld.
The POB believed that the consultative role in its charter with respect
to the appointment of committee chairs and members would lead to the
same outcome as the approval role recommended by the Panel. The POB
believed that if a problem were to arise, the AICPA would reasonably
consider the POB’s views.
In addition to the gaps in the POB’s authority for oversight of the
self-regulatory system highlighted in the Panel’s study, the POB’s
oversight authority was limited to those firms that are members of the
SECPS. Although the 1,300 firms that are members of the SECPS audit SEC
registrants, which are the nation’s largest companies, there are
thousands of other public accounting firms that are also members of the
AICPA that provide audit and attest services that businesses,
creditors, and investors rely on in making business and financial
decisions. As members of the AICPA, these firms are subject to peer
review through the AICPA’s peer review program for auditors of non-SEC
clients, rather than the SECPS and, therefore, are outside the
oversight authority of the POB.
Funding the POB and Its Activities:
The POB was funded through the membership dues of the SECPS. The
Panel recommended that the POB’s charter should provide the POB with
sole authority to determine its budget and financial and other
resources, and the accounting profession’s obligation to provide those
resources. The Panel strongly believed that such “no-strings-attached”
funding was absolutely essential if the POB was to be effective and
independent of the accounting profession and if the self-regulatory
system was to be viable. The Panel’s recommendation was not fully
accepted. The POB charter provides for the POB to submit its budget to
the SECPS Executive Committee, and, if the AICPA Board requests, to the
AICPA Board, for consultation. The POB advised us that its charter
essentially formalized and continued the budget process that it
previously followed, except for a cap on its budget, which attaches an
additional “string” on the POB’s funding.
The POB charter contains a new provision capping the POB’s annual
budget at $5.2 million. The charter does contain provisions for
supplemental requests subject to the above review process and adjusting
the ceiling for inflation. Further, the POB charter provides that the
SECPS Executive Committee and the AICPA Board may raise the budget
ceiling based on consideration of all the circumstances and public
interest at any time during the year.
The POB stated that the principal players who developed the concept of a
budget ceiling were one or more of the five largest public accounting
firms and the AICPA, and the concept was then agreed to by the SEC
Chairman. The SEC Chief Accountant at that time told us that the SEC
was having difficulty getting the largest public accounting firms to
agree on a charter for the POB, and at the same time, there was some
reluctance by one or more of the firms to fund the POB to arrange for
review of the largest public accounting firms’ internal systems for
compliance with auditor independence rules. He stated that the SEC
Chairman viewed the budget cap as a way to get the firms to agree on a
charter for the POB. The POB Chairman told us he did not support the
budget cap, and had initiated actions, including the additional
provisions discussed above in the POB charter, to mitigate the impact
of a ceiling provision on its operations and independence.
The POB believes it did not have sole authority to determine its budget,
financial, and other resources in light of the ceiling in its charter.
The POB believes that notwithstanding the restrictive budget provisions
in the charter, the provisions should not have impeded its ability to
operate. The POB and the Panel believe that because funding problems
for the POB could be made public, there was a strong incentive for the
SECPS to meet the funding needs of the POB and not have such issues
aired in public.
In July 2001, the POB told us it believed it had the resources to
conduct the enhanced oversight role as provided for in its charter. The
POB’s budget data for its recurring expenditures show that the $5.2
million budget ceiling represents more than a 50 percent increase over
its fiscal years 2000 and 2001 budget and 2002 preliminary budget
expenditures. However, the POB budget data for fiscal year 2000 show
that when nonrecurring expenditures, such as special studies, are
included, the budget total is within about $700,000 of the $5.2 million
ceiling.[Footnote 13] In addition, it clearly did not have the funding
autonomy called for by the Panel.
Communications Within the Self-Regulatory System and With the Public
Regulatory Systems:
Constraints on effective communication with the SEC and among the
various entities in the self-regulatory system were among the
overarching limitations of the accounting profession’s governance
system identified by the Panel. Given the multiple components of the
governance system, the Panel believed that the POB should serve as a
strengthened, unifying oversight body to whom the SEC, the state boards
of accountancy, the accounting profession, and the public should look
to for leadership. The Panel intended for the POB to enhance
communications among the components of the accounting profession’s
governance system in order to facilitate the profession’s continuous
improvement efforts and to identify and resolve important issues on a
timely basis.
The Panel’s recommendations included that (1) the POB establish an
advisory council to advise the POB on issues related to projects on its
agenda, (2) the POB establish a coordinating task force of the chairs of
each body within the POB’s oversight, (3) the POB and the SEC
acknowledge the need to maintain a mutual respect and confidence, and
increase the public’s respect for the profession and its role in the
capital markets, and (4) the POB and state boards of accountancy,
perhaps through the NASBA, determine how best to facilitate meaningful
continuing dialogue between the POB and state boards.
The POB charter provides for a coordinating task force as recommended
by the Panel, but does not establish an advisory council. The POB
charter instead provides for the POB to hold an annual outreach meeting
to solicit views and recommendations about the accounting profession’s
self-regulatory program and the POB’s oversight process. Further, the
POB charter provides that the effectiveness of the annual outreach
meeting and whether it alleviates the need for an advisory council be
included in the 3-year evaluation of the POB’s effectiveness required
by its charter.
The POB advised us that it planned to have periodic meetings with the
SEC. Also, the POB planned to begin a dialog with the NASBA and several
state boards of accountancy to explore ways to improve communications.
However, on January 20, 2002, the POB passed a resolution expressing its
intent to terminate its existence. In the resolution, the POB Chairman
was critical of the SEC for not consulting with the POB on the SEC’s
plans for a new body to govern the accounting profession’s discipline
and quality control functions. The POB’s resolution stated, in relevant
part:
Be it resolved, after due consideration of the importance of effective
self-regulation as one aspect of the oversight of the accounting
profession, but with recognition of the obstacles to achieving this
goal which have been encountered in recent years, and given the
proposal of the SEC in consultation with the AICPA and the SECPS
Executive Committee, without input from the POB, to reorganize the self-
regulatory structure, the POB intends to terminate its existence
pursuant to Section IX of the POB Charter no later than March 31,
2002.[Footnote 14]
Peer Review Program:
The structure of the SECPS peer review program has evolved since its
inception in response to many studies of the program over the years. The
latest study of the peer review program, conducted in March 1999 by the
Peer Review Process Task Force, identified areas of the peer review
program that needed improvements.[Footnote 15] The formation of the
Peer Review Process Task Force and the need to reexamine the peer
review program was encouraged by the PRC, the POB, and the SEC, which
were seeking enhancements in the reporting of the results of peer
reviews; improvements in the effectiveness of peer reviews;
comprehensive governance and oversight of the peer review process; and
peer reviews performed by appropriately qualified and trained
reviewers. A Panel staff member participated in the Peer Review Process
Task Force’s deliberations. In its report, the Panel recommended that
all of the Peer Review Process Task Force’s recommendations be
implemented and made additional recommendations to the SECPS, the POB,
the ASB, and the SEC to strengthen the peer review process and expand
oversight of peer reviews. Both the work of the Peer Review Process
Task Force and the Panel was limited to improving the peer review
program within the existing self-regulatory system and therefore did
not consider a different body for conducting or overseeing the program.
In January 2001, the SECPS Executive Committee approved a pilot test of
a plan to modify the approach to conducting and reporting on peer
reviews, including expanding the oversight of peer reviews. The pilot
program incorporates almost all of the recommendations made by the Peer
Review Process Task Force and the Panel. The peer review program
currently being piloted places a greater emphasis on obtaining an
understanding of the audit team’s approach to the audit, including the
team’s thought processes and identification and testing of emerging
issues and high-risk areas, as well as better insight into the
knowledge, skills, training, and experience of the audit team. The
pilot program separates SECPS member firms into two tiers primarily
based on the firm’s size and requires the larger firms[Footnote 16] to
undergo “continuous” peer reviews, that is, some level of review each
year. The PRC has also approved new reporting standards for peer
reviews, effective June 30, 2001, that require peer review reports to be
more descriptive to enable users to better understand the peer review
findings and peer review process. In addition, the POB’s oversight of
the peer reviews of the largest firms was expanded to include more
timely and extensive visits to the offices that are being reviewed.
Other than approving new reporting standards, the AICPA has not
finalized these enhancements to the SECPS peer review program. Also,
there are certain recommendations made by the Peer Review Process Task
Force and the Panel to strengthen peer review that either were not
addressed or were not fully implemented at the time of our study. These
recommendations concern revisions to the standards governing peer
review; the qualifications and training of peer reviewers;
consideration of the POB as the primary client of peer review; and the
development, analysis, and reporting of performance measures,
performance indicators, and other data that may be useful to users of
peer review reports.
Quality Control Standards:
The Peer Review Process Task Force believes that one of the root causes
of some of the criticisms of the peer review process relates to the
lack of specificity of the quality control standards.[Footnote 17] In
the Panel’s view, the quality control standards are broad and general,
making it difficult to critique compliance against the standards; thus,
the Panel believes that firms with weaker practices can still receive
unqualified peer review opinions. The Panel recommended that the
quality control standards be made more specific and definitive for
firms with public clients, especially for the largest firms.
An AICPA task force (made up of the ASB, the PRC, the QCIC, and other
AICPA groups), which was established to consider the Panel’s
recommendation concerning the quality control standards, has tentatively
concluded that given the variety of attest services covered by the
standards and the various sizes of public accounting firms that follow
the standards, the Panel’s recommendations can best be addressed by
providing more specificity to a guide that accompanies the standards.
[Footnote 18] Through its process of updating the guide, the AICPA task
force plans to consider whether any guidance should be elevated from
the guide to a standard.
Qualifications and Training of Peer Reviewers:
Peer reviews are performed by public accounting firms that have received
an unqualified report on their own peer review. The PRC issues standards
describing the qualifications and training requirements for peer
reviewers[Footnote 19] and in each peer review, the PRC evaluates the
peer reviewer’s competence and performance. The PRC has the authority
to reject a firm that has been engaged to perform a peer review. The
Peer Review Process Task Force believes the current training courses
and approach to training peer review team captains and reviewers needs
to be enhanced to meet the needs of the peer review program. The Peer
Review Process Task Force also believes there are additional measures
that should be taken to promote independence and objectivity of peer
reviewers.
The Peer Review Process Task Force made several recommendations to
improve the performance and independence of peer reviewers including
recommending that the PRC (1) establish a standing task force that will
oversee the peer review training programs, (2) develop a system for
evaluating the performance of the team captains, and (3) limit the peer
review team captains for the reviews of the largest firms to two
consecutive triennial reviews of the same firm and a total of three
consecutive reviews as an engagement team member. The Panel recommended
that the POB should review the qualifications of the peer review firm
and the peer review captain.
The PRC has acted on the recommendations concerning qualifications and
training of peer reviewers; however, not all actions are finalized. For
example, the PRC told us it plans to revise the peer review standards
in the spring of 2002 to enhance peer reviewer independence and
objectivity such as to limit the peer review team captains for the
reviews of large firms to two consecutive reviews of the same firm and
a total of three consecutive reviews as engagement team members. The
AICPA told us that the large firms have already voluntarily complied
with the related planned changes to the standards. Also, the POB
indicated that it has always reviewed the qualifications of the peer
reviewers and the peer review team captains, and when it believes
appropriate, makes suggestions for changes.
Primary Client of Peer Review:;
Peer reviews are performed to enhance the public’s confidence in
independent auditors. The Panel felt that the POB, as the public’s
representative, should be viewed as the principal stakeholder in the
peer review process and accordingly recommended that it should be made
clear to peer reviewers that the POB, not the firm being reviewed, is
the primary client. The Panel wanted the peer reviewers to have the “
mind-set” that peer reviews are performed in the best interest of the
public, and not solely for the benefit of the reviewed firm. By
considering the POB as the primary client, the Panel hoped the peer
reviewers would bring the POB more into the process up front and
continue to keep them apprised of issues throughout the review. The POB
could then be in a better position to monitor and oversee the reporting
of peer review results.
The AICPA did not accept the Panel’s recommendation that the POB should
be the primary client of the peer review because the PRC, not the POB,
is responsible for maintaining and administering the peer review
program. The AICPA did adopt a related Peer Review Process Task Force
recommendation to address the peer review reports to both the PRC and
the reviewed firm. The Peer Review Process Task Force made this
recommendation because it felt that the PRC serves as an “audit
committee” and that including the PRC as an addressee on the peer review
report would emphasize to peer reviewers and reviewed firms that they
should consider the PRC as the “audit committee.” However, the Panel
told us that including the PRC as an addressee on the peer review
report does not satisfy the intent of its recommendation to have the
POB be the primary client of peer review. The Panel acknowledged that
the new pilot program now underway, which includes greater involvement
by the POB on a continuous, real-time basis, should help the POB gain
insight early on as to any quality control issues that should be
reflected in the peer review report. However, the Panel cautioned that
until the pilot procedures are made final, it is uncertain the POB
would have continued with its real-time oversight of peer review.
Peer Review Reporting Model:
The Peer Review Process Task Force believes that in order to best serve
the public interest, the peer review reporting model, in addition to
communicating matters identified during peer reviews, should also
provide for the communication of best practices, constructive
suggestions that go beyond the professional standards, and matters for
the attention of standard setters. To address these points, the Peer
Review Process Task Force recommended that the SECPS study whether
there are key quantitative and qualitative performance indicators that
would be useful to users of SECPS member firms’ annual reports or peer
review reports. The Panel further recommended that the SECPS develop
specific performance measures, to be included in the peer review
report, that relate to the quality of the firm’s practice/effectiveness
of audits. The AICPA has told us that it has not been able to identify
indicators that are relevant, objective, or measurable; however, the
PRC has established a standing task force to continuously consider ways
of improving the peer review process including the identification of
such quantitative matters.
Accounting Profession’s Disciplinary Process:;
The Panel found that the public perceives the self-regulatory system’s
disciplinary process to be slow and ineffective and to suffer from a
number of limitations. Specifically, the Panel reported that:
* the Ethics Division has limited investigative powers as it cannot
issue subpoenas or compel testimony; therefore, it must rely on the
cooperation of the individual being investigated but cannot talk to the
plaintiff or the client company involved;
* investigative proceedings are not timely because the Ethics Division’s
policy is, in the interest of fairness to the member, to defer its
investigation until all litigation or regulatory actions are concluded;
* discipline proceedings are confidential and, therefore, the public
cannot determine the reason why a sanction was imposed or, in some
cases, whether a sanction was imposed at all; and;
* the Ethics Division can impose only limited sanctions, such as
requiring continuing professional education or suspending or revoking
AICPA membership, because the Division’s authority extends only to
membership rights.
The Panel found that the QCIC process suffers from many of the same
limitations, although its investigations are timely. QCIC corrective
actions imposed on firms are not made public. In addition to lacking
subpoena power, both the QCIC and the Ethics Division lack protective
power for their investigative files.
The Panel found that some state boards of accountancy have not been
effective in disciplining substandard conduct due to limited budgets and
the lack of effective means to investigate allegations and impose
disciplinary measures. Similarly, the Panel found that competing demands
on the SEC’s resources and its own prosecutorial priorities limit its
enforcement activities.
The Panel concluded that while the self-regulatory system is not totally
satisfactory, the profession has made a significant effort to make it as
workable as practicable given its inherent limitations. The Panel also
concluded that the self-regulatory system needs protective power over
its disciplinary activities if it is to resolve disciplinary matters on
a timely basis, but that such protective powers are obtainable only
through legislation. The Panel believed that there was little assurance
that such legislation was attainable at the time of its study or in the
foreseeable future. Therefore, the Panel made various recommendations
to improve the disciplinary process to provide greater protection to
the public without recommending legislative changes necessary to
provide protective powers. The Panel’s recommendations, instead, were
directed at protecting the public interest, the timing of
investigations, the transparency of information reported on
investigations and disciplinary actions, and leveraging the results of
investigations.
The Panel’s recommendations were largely made to components of the self-
regulatory system, although some recommendations were made to the SEC
regarding resources and leveraging information from its investigations.
The Panel did not recommend extending the POB’s authority to oversee
disciplinary functions other than to have the POB involved with the
QCIC in reviewing certain firm’s actions when there is an allegation of
audit failures as discussed below. In addition, the Panel did not make
any recommendations to the state boards of accountancy in the area of
the profession’s disciplinary process. The Panel recommended that the
POB and the SECPS review the results of implementing its
recommendations over a 2- to 3-year period to determine their
effectiveness. The Panel recommended that if the POB and the SECPS
subsequently find that actions taken in response to the Panel’s
recommendations to improve the disciplinary process have not
satisfactorily protected the public, the POB, in cooperation with the
SEC, should seek legislation to achieve the protections necessary to
make the disciplinary process more effective.
Immediate Disciplinary Actions When Members Named in Litigation:
In accordance with the Panel’s recommendation, the SECPS membership
requirements were revised as follows when civil litigation or a
criminal or public regulatory investigation contains allegations of an
audit failure:
* The firm is required to conduct an internal review of the subject
engagement to evaluate the performance of the senior engagement
personnel.
* The QCIC should conduct its usual inquiry. If the QCIC believes that
standards may have been violated and, accordingly, refers the case to
the Ethics Division, the firm would be notified that the Ethics
Division is deferring its investigation pending the completion of the
litigation.
* The firm is then required to take one of the following options to
apply to the partner during the period of deferral, if the individual
is still associated with the firm: (A) terminate or retire the
individual from the member firm, (B) remove that individual from
performing or supervising audits of public companies until the Ethics
Division’s enforcement process is completed, or (C) subject that
individual to additional oversight on all public company audit
engagements in which that individual is involved. Additional oversight
is defined to mean for at least 1 year, the individual will perform
such audits subject to oversight by a senior technical partner
appointed by the member firm’s Managing Partner/CEO. The senior
technical partner oversight of such engagements, at a minimum, will
meet the SECPS’s concurring partner review membership requirement and
procedures prescribed for engagements defined as high risk. Thereafter,
the individual must remain under the additional oversight that the
firm’s Managing Partner/CEO determines, in light of that person’s
evaluation of the individual’s performance, is necessary to protect the
public interest.
The member firm has the responsibility of deciding on the selection of
one option A, B, or C above. The implementation of the option selected
is subject to review in the member firm’s peer review and by the POB.
In the event that the partner in question joins another SECPS member
firm, the new firm must apply one of the above options to the partner
until the Ethics Division completes its investigation. However, should
the partner in question join a firm that is not a member of the SECPS,
no such restrictions on the partner’s activities would apply during the
course of the litigation or the Ethics Division’s investigation. The
POB and the SECPS advised us that the above options are effectively “
career ending actions” for the members.
Reducing the Time for Ethics Division and SEC Investigations:
The Panel recommended that the Ethics Division devote more resources to
its investigations in order to decrease the time it takes to conduct an
investigation after a deferral is lifted. The Panel also recommended
that the SEC allocate additional resources to its enforcement
activities directed at allegations of failed audits.
Because the Ethics Division lacks protective power, the Ethics
Division’s policy is to defer its investigation pending the outcome of
litigation or regulatory enforcement actions in fairness to the AICPA
members. Accordingly, the Ethics Division defers cases involving SEC
registrants, generally for 2 to 3 years, until litigation or regulatory
enforcement actions are completed. The Ethics Division stated that if
it had protective power, deferral of the investigation would be
unnecessary and the timeliness of the disciplinary process would be
significantly enhanced because the legal or regulatory enforcement and
ethics disciplinary processes could proceed simultaneously.
The lack of protective power not only contributes significantly to the
length of time before the Ethics Division commences its investigations,
but also results in other regulatory bodies not being willing to share
investigative information, which also adds to the time required to
complete the Ethics Division’s investigation. The Ethics Division
believes that having subpoena power would allow its staff to
investigate cases more effectively once it begins an investigation.
However, the ability to issue subpoenas would not likely result in
significant improvements to the timeliness of the process.
The lack of protective power may also affect the Ethics Division’s
ability to work cooperatively with the state boards of accountancy on
investigations. The Ethics Division has entered into cooperative
investigative agreements with four states that, with the member’s
consent, allow it to conduct investigations and share the results with
the four state boards of accountancy. The Ethics Division stated it
will attempt to expand this type of cooperative agreement to other
states, but states previously have expressed little interest in such an
arrangement.
The Ethics Division told us that, in the past few years, it had
difficulty recruiting qualified staff with expertise in SEC accounting
and reporting matters, which resulted in excessive caseloads for
existing staff. However, the Ethics Division currently believes it now
has the necessary resources to complete investigations involving SEC
registrants in an effective and timely manner as a result of the SECPS
providing funding for three additional staff members. The Ethics
Division told us that, in the past, its average time to complete an
investigation was 18 months after a deferral was lifted; however, it
now estimates that such cases will be completed in about 11 to 14
months.
In response to the Panel’s recommendation that the SEC allocate
additional resources to its enforcement activities directed at
allegations of failed audits, the SEC believes that its recently
created Financial Fraud Task Force will improve the timeliness of SEC
enforcement actions, which usually take 2 to 3 years or longer to
investigate. The SEC also believes that encouraging companies to engage
in cooperative measures that are both preventive and remedial will
allow the SEC to maximize the use of its enforcement staff.
Lack of Coordination Within the Disciplinary Process:
NASBA officials told us that neither the SEC nor the AICPA share
information involving disciplinary matters freely with the state boards,
which delays the timing of disciplinary actions the state boards can
take and therefore allows auditors to continue to practice at the
potential risk to the public.[Footnote 20] NASBA officials believe the
AICPA’s lack of protective powers has inhibited it from sharing
information with the state boards of accountancy; however, the NASBA
officials stated that even though the SEC has protective powers, it
still does not share information freely. The SEC told us that both
during and after an investigation, the SEC enforcement staff may
discuss cases with state board investigators. The SEC also said it
sends information pertaining to an enforcement case to the relevant
state board along with a draft access request that the board may use to
contact the SEC. Further, the SEC stated it had recently discussed with
the representatives of the NASBA and of several state boards ways in
which the state boards might gain access to the SEC’s investigative
records while the investigation is still in process in order to improve
the timeliness of the state boards’ access to SEC records. The Panel
did not recommend any specific actions for the SEC, the AICPA, or the
state boards of accountancy to better facilitate coordination of
investigations and disciplinary actions between them. However, the
Panel indicated it would support legislation giving the self-regulatory
bodies protection through the right of privilege over their
disciplinary activities if this would ensure more timely resolution of
alleged audit failures.
Transparency of Disciplinary Actions:
To improve the public’s perception of the effectiveness of the self-
regulatory disciplinary system, the Panel recommended that the POB
(1) summarize in its annual report the status of all Ethics Division
investigations of AICPA members when civil litigation and public
regulatory investigations related to audits of SEC registrants have been
concluded, and (2) report in its annual report on an aggregate, no-name
basis, including matters that are concluded through the retirement of
the partner, Ethics Division decisions or settlement of litigation.
The AICPA advised us that the Ethics Division’s PEEC has appointed a
Statistical Reporting Task Force and a Disciplinary Task Force with the
objectives of improving statistical reporting and making the information
more descriptive and informative. A representative of the POB attends
the ongoing meetings of the Statistical Reporting Task Force aimed at
addressing the Panel’s recommendations.
Leveraging the Results of Disciplinary Investigations:
The Panel recommended that the POB leverage the knowledge it gains
through oversight to determine whether changes in professional standards
or further guidance is needed and communicate these findings to the
appropriate standard setter or authoritative bodies. The POB has formed
a coordinating task force, comprised of the heads of each of the
components of the self-regulatory system, that will be used to share
and leverage information. The staff director of the Transition
Oversight Staff (see footnote 4) informed us that the coordinating task
force will continue to exist after the POB’s termination.
The Panel recommended that the SEC should periodically undertake
studies of its Accounting and Auditing Enforcement Releases (AAER) and
disseminate the results. The Panel also recommended that the SEC
document information on the auditors’ work in every enforcement
investigation involving materially misstated financial statements, not
just those in which the auditor is named in the enforcement action.
However, the SEC did not accept these recommendations as it believes its
enforcement actions are sufficiently analyzed and publicly discussed by
the SEC and others and that the marginal benefits of additional study
would not justify the use of limited staff resources and other costs.
Also, the SEC stated it already reviews the conduct of auditors in
virtually every enforcement investigation involving materially
misstated financial statements. The SEC further stated that if it finds
that the auditor’s work constitutes a violation of the securities laws
or professional standards, the SEC documents its findings in public
proceedings, AAERs, or press releases. The SEC staff question the
advisability of discussing, in public enforcement releases, the conduct
of accountants that is not deemed to violate the securities laws or
professional standards, as such discussions may be viewed as tantamount
to the SEC writing auditing standards.
Observations:
The Panel’s recommendations were made within the context of the existing
self-regulatory system and the actions taken by the various parties
enhanced the self-regulatory system that existed at that time. On
balance though, the overarching problems of the self-regulatory system
remain. The system continues to be fragmented, and communications and
coordination problems continue. The disciplinary function has limited
investigative powers and sanctions, lacks transparency, is not timely,
and is widely perceived to be ineffective.
Significant gaps continued to exist in the authority of the POB to
oversee the functions of setting auditor independence rules and
disciplining members of the auditing profession. These functions are
fundamental to the self-regulatory system and therefore should be
included as part of the oversight function. Further, we believe such
oversight authority should extend to ensuring that the standard-setting
bodies of the self-regulatory system address areas of concern about the
adequacy of the standards and that revisions to the standards
effectively protect the public interest.
Improvements recommended by the Panel for the accounting profession’s
peer review program are being focused on an approach to more directly
address the public accounting firms’ consideration of the audited
entity’s risks and ensure the appropriate resources of the firm are
involved with the audit work. Further, the continuous peer reviews of
the large firms, together with real time oversight, have the potential
to more timely identify and effectively address problems. However, the
AICPA has not finalized these enhancements and experience will be
needed to judge their effectiveness in enhancing the peer review
program.
On a related issue, consistent with the Panel’s recommendation, the
POB’s successor needs to ensure that the final peer review report
reflects the problems identified by peer review and that the root cause
is effectively addressed, which could be within the public accounting
firm, accounting and auditing standards, or with quality control
standards. Further, as the Panel recommended, the ASB needs to ensure
that the quality control standards are sufficiently clear to provide
for meaningful and consistent application and enforcement.
The independence of the POB’s successor needs to be assured. The POB
did not receive sole authority to determine its budget and resources,
and the accounting profession’s obligation to provide them, as
recommended by the Panel. It is not unreasonable for the SECPS to
expect that the POB would be accountable for funds received and
expended. However, capping the POB’s budget in its charter could be
perceived as a limitation of the accounting profession’s support for
effective oversight to protect the public interest. Further, necessary
work by the POB’s successor may be delayed if it needs to seek funds
for special studies or other matters. If funding for the POB’s
successor is to continue to come from the accounting profession, then
as the Panel stated, the profession must not be able to control or cut
off resources, which would potentially destroy the oversight body’s
independence and others’ confidence in it.
Experience with the SECPS’s new membership requirements that may
“effectively bench” members named in litigation alleging an audit
failure is needed to judge its ultimate effectiveness. However, as
recognized by the Panel, the self-regulatory system must also have the
necessary powers to timely and effectively address alleged
noncompliance with professional standards. The Ethics Division’s
investigations without protective powers will continue to take years to
complete after an allegation of an audit failure is initially made
through litigation and will perpetuate the Panel’s findings that the
public’s perception is that the disciplinary process of the self-
regulatory system is not timely or effective.
Providing powers to the self-regulatory system to protect the
confidentiality of investigation files raises difficult issues
regarding the lack of a statutory basis of the self-regulatory system
and whether fundamental changes to the self-regulatory system will be
needed if the powers are provided. As the Panel reported, this issue
needs to be resolved by the POB’s successor working cooperatively with
the AICPA, the SEC, and other stakeholders. Further, the Panel
recognized the limited disciplinary measures that exist within the self-
regulatory system. The effectiveness of disciplinary actions taken by
the self-regulatory system remains an open issue.
It is too early to evaluate whether the SEC’s task force approach to
investigations will significantly reduce the time for investigations.
Similarly, the SEC needs to gain experience with its efforts to
encourage companies to engage in preventive and remedial measures. If
resource limitations continue to affect the SEC’s timeliness for
investigations, as well as the number of cases it can effectively
process simultaneously, then the SEC, as recommended by the Panel,
should pursue obtaining the necessary resources.
Although the SEC did not accept the Panel’s recommendations for
leveraging the results of every disciplinary investigation, the
successor to the POB’s coordinating task force could fill this void by
ensuring that SEC enforcement actions are discussed by the task force,
with the SEC participation, for consideration of whether changes in
professional standards or further guidance is needed.
As the Panel recognized, the transparency and completeness of
disciplinary actions could be enhanced by relating the AICPA’s
disciplinary actions to disciplinary actions of regulators, so that the
public has a more complete picture of the disciplinary actions of the
self-regulatory and public regulatory systems. Further, transparency
could be improved by providing more detailed information about the
case, such as naming the firm, individuals involved by position, the
standards violated, and the disciplinary action taken.
The action by the SEC and the AICPA, working with the largest public
accounting firms to develop a proposed change to the self-regulatory
system without involving the POB, demonstrates the seriousness of the
communication problems that exist within the self-regulatory system and
the lack of effective relationships between the POB and the SEC. The
SEC, as a public regulator under the Securities Act of 1933 and the
Securities Exchange Act of 1934, has significant responsibilities
related to accounting and auditing rules and the accounting profession’
s self-regulatory system. The SEC needs to work cooperatively with the
POB’s successor to support the self-regulatory system and leverage SEC
activities to enhance the effectiveness of the self-regulatory system
to support the public interest.
The POB’s successor, the AICPA’s Ethics Division, and the SEC also need
to build effective working relationships with the state boards of
accountancy. Although these parties have common interests, they
generally work separately and information is not freely shared, which
contributes to the public perception that the disciplinary function of
the accounting profession is not timely or effective. As discussed
above, this issue is complicated by jurisdictional issues as well as
the lack of powers within the self-regulatory system to protect the
confidentiality of investigative information, all of which limit
actions that can be taken to improve the disciplinary process.
Legislation will likely be necessary to effectively resolve this
problem since the self-regulatory system lacks a statutory
foundation.
Agency Comments and Our Evaluation:
We provided the POB, the AICPA, the NASBA, the SEC, and the former
Chair of the Panel on Audit Effectiveness, with a draft of our report
for review and comment.
The POB commented that the draft report provided useful information
concerning the status of the Panel’s recommendations. The POB also
stated that it would be helpful to readers of the report to include not
only any differences between the Panel's recommendations and the
actions, taken or proposed, to implement those recommendations, but
also (1) an explanation for the differences, and (2) an evaluation of
the reasonableness of such differences. We believe that we have
identified all significant differences and provided observations on
such differences. The POB provided one example of where it believed a
gap existed between the Panel’s recommendation and the AICPA’s
implementing action. The POB stated that the AICPA’s response to the
Panel’s recommendation only addressed the POB’s authority to review the
implementation of a firm’s action against a partner when legal action
is taken against the partner resulting from the audit. The POB pointed
out that the Panel also recommended that the POB review the firm’s
process for deciding its action against the partner. The AICPA advised
us that the POB had the authority to also review the firm’s decision as
recommended by the Panel.
The AICPA commented that it does not believe the POB oversight over the
PEEC’s standard-setting activities was necessary given the level of
public representation on the PEEC and given that the SEC is the primary
independence standard-setter for public company auditors. However, we
continue to support the Panel’s recommendation that the POB’s successor
should have oversight over the PEEC’s independence standard-setting
activities, particularly in light of the SEC’s point made in its
comments on our draft report. The SEC’s Chief Accountant, who provided
comments on the draft report, explained that in some instances the PEEC
independence rules can apply to SEC registrants. For example, in
situations where a PEEC ruling addresses an area that is not covered by
the SEC’s rules and is not inconsistent with the general policies
underlying the SEC’s rules, the SEC staff might consider the PEEC
ruling in reaching its decision on an issue.
The AICPA also commented that it has always supported independent
public oversight with fiscally accountable “no strings” funding.
However, in the POB Chairman’s recent statement during a congressional
hearing,[Footnote 21] he specifically mentioned that the current system
of self-regulation of the accounting profession has significant
problems, including the fact that POB funding is subject to control by
the firms through the SECPS. He pointed out that in the past, the SECPS
cut off that funding in an effort to restrict POB activities. In
addition, the AICPA and the SECPS insisted on a cap on the POB funding
when the new POB charter was created.
The AICPA commented that although the Panel report recommended that
peer review reports be addressed to the POB rather than the firm
subject to peer review,[Footnote 22] the PRC fully considered this
recommendation and concluded that it would have no affect on the
quality of the peer review or the content of the peer review reports.
The PRC further concluded that the peer review reports would be more
appropriately addressed to the PRC as the body responsible for
maintaining and administering the peer review program. As discussed in
our report, we continue to believe that addressing the peer review
report to the PRC does not satisfy the intent of the Panel’s
recommendation to have the POB be the primary client of the peer
review. The Panel wanted the peer reviewers to have the “mind-set” that
peer reviews are performed in the best interest of the public, and not
solely for the benefit of the reviewed firm. By considering the POB as
the primary client, the Panel hoped the peer reviewers would likely
bring the POB more into the process up front and continue to keep them
apprised of issues throughout the review. In its comments on the draft,
the POB also expressed concerns that peer review reports are addressed
to the PRC rather than the POB. The POB stated that it believes that
the PRC, which has responsibility for maintaining and administering the
peer review program, is more like a management function rather than an
audit committee function and, therefore, should not be the primary
client of the peer review process.
In comments on the draft report, NASBA officials reiterated the
importance of communication, coordination, and sharing of information
between the various components of the regulatory structures and the
state boards of accountancy to better protect the public interest. For
example, NASBA officials believe that for peer review to be effective,
it has to be more clearly linked to the regulatory process, which would
include forwarding to all state boards modified or adverse peer review
reports so that licenses could be limited when appropriate, suspended,
or revoked. In addition, firm registration renewal in many states
depends on having completed a peer review, but the results of those
reviews, in most cases, are not provided to the state boards. NASBA
officials also stated that state boards operate on a complaint-driven
system. Accordingly, NASBA officials believe that, to protect the
public interest, the PEEC should directly make referrals, whether or
not they relate to members of the SECPS, to state boards. We share the
NASBA’s concerns related to the need to improve working relations
between the state boards and the other components of the regulatory
structure. As stated in our report, we believe that the POB’s
successor, the Ethics Division, and the SEC need to build effective
working relationships with the state boards of accountancy. Although
these parties have common interests, they generally work separately and
information is not freely shared, which contributes to the public
perception that the disciplinary function of the accounting profession
is not timely or effective.
The comments of the Chair of the Panel on Audit Effectiveness were
provided orally and were in agreement with our findings and
observations. The SEC Chief Accountant’s comments were primarily
technical comments, which are incorporated as appropriate. The POB, the
AICPA, and the NASBA, also provided technical comments, which we
incorporated as appropriate. Written comments from the POB, the AICPA,
and the NASBA are included in appendices III through V, respectively.
As agreed upon with your office, unless you announce its contents
earlier, we plan no further distribution of this report until 30 days
after its issuance. At that time, we will send copies of this report to
officials of the Public Oversight Board, the American Institute of
Certified Public Accountants, the Panel on Audit Effectiveness, the
Securities and Exchange Commission, the National Association of State
Boards of Accountancy, and other interested parties. We will make
copies available to others upon request.
For additional information, please contact Jeffrey C. Steinhoff,
Managing Director, Financial Management and Assurance, at 202-512-2600
or steinhoffj@gao.gov. Robert W. Gramling, Cheryl E. Clark, and Michael
C. Hrapsky made key contributions to this report.
Sincerely yours,
Signed by:
David M. Walker:
Comptroller General of the United States:
[End of section]
Appendix I: POB Charter Provisions Responding to the Panel on Audit
Effectiveness’ Recommendations:
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 1.1) The POB charter should address its
sole authority to determine its budget and financial and other
resources, and the profession's obligation to provide those resources.
(Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's funding shall be provided by the SECPS and
its members through the AICPA. The POB must submit an annual budget to
the SECPS Executive Committee, and to the AICPA Board if requested, for
consultation. The budget shall not exceed $5.2 million. Provisions are
made for unanticipated oversight reviews by submitting a supplemental
budget that is also subject to the above review process. Once this
consultive process is done, the SECPS Executive Committee and the AICPA
are not to withhold funding for any reason. The annual budget ceiling
is indexed to the Consumer Price Index. The POB is required to monitor
its expenses and report any material variations likely to occur to the
SECPS Executive Committee and the AICPA.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 1.2) The POB's annual statement of
expenditures should be audited and included in the POB's Annual Report
to evidence its financial accountability. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: In furtherance of financial accountability, the POB is
required to have its expenses audited annually and included in its
annual report.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 2.1) The POB charter should address its
authority to oversee the activities of the ASB, the Independence
Standards Board, the SECPS Executive Committee, the QCIC, the SECPS
Peer Review Committee, the Professional Issues Task Force, the SEC
Regulations Committee, and the standard-setting activities of the PEEC
that relate to audits of public companies. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter provides oversight authority with
respect to the ASB, Independence Standards Board, SECPS Executive
Committee, QCIC, SECPS Peer Review Committee, Professional Issues Task
Force, and the SEC Regulations Committee, but not the PEEC.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 2.3) The POB should approve all
appointments to the ASB, SECPC Executive Committee, and the
Independence Standards Board’s Independence Issues Committee, as well
as Independence Standards Board members who represent the public
accounting profession. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: For the ASB and the SECPS, the POB is to be consulted
for nominations for members and concur in the selection of the chairs;
such concurrence is not to be unreasonably withheld. Regarding the
Independence Standards Board, the POB is to consult and advise on all
nominations.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 2.4) The POB should annually evaluate
whether the resources that the AICPA and the SECPS provide to the ASB
and the SECPS are sufficient for those bodies to meet their mandates.
(Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter provides for the POB to evaluate the
adequacy of resources provided to the ASB and the SECPS, and to set
forth its evaluation in its annual report.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 2.5) The POB should oversee the AICPA's
evaluation, compensation, hiring and promotion decisions with respect to
employees who constitute the ASB and SECPS staffs. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: Not addressed in the POB's charter.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 3.1) The POB charter should establish term
limits for POB members. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The term of a member is 5 calendar years ending on
December 31. A member may be reappointed by a two-thirds vote of
members in office, but shall not serve for more than two full terms
plus the balance of any term filled by that member as a result of a
vacancy.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 3.2) POB members should be limited to two 5-
year terms, with staggered terms to ensure continuity. (Paragraph
6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: As stated above, members terms are limited to two 5-
year terms. The POB's charter provides that members terms shall be
staggered to ensure continuity so that the term of one member shall
expire each year.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 4.1) The POB charter should address
establishing a nominating committee responsible for identifying and
nominating new POB members. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter provides for a nominating committee
consisting of three persons with the authority to nominate new members
for the POB for each vacancy on the POB caused by resignation, removal,
or death, consistent with the eligibility requirements in section 11.
A. of the charter, which provides that members shall be drawn from
among prominent individuals of integrity and reputation, including, but
not limited to, former public officials, lawyers, bankers, non-
practicing CPAs, securities industry executives, educators, economists,
and business executives.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 4.2) The nominating committee should be
appointed by the POB from names suggested by public and private
institutions that are most concerned with the quality of audits and
financial reporting. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The nominating committee is to consist of the POB
chair or his/her designee from among the members, a former public
member of the AICPA Board to be selected by the AICPA Board, and a
person from the private sector. The POB chair or his/her designee and
the former public member of the AICPA Board will, in turn, jointly
select the third member of the nominating committee from the private
sector.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 5.1) The POB charter should address
establishing an advisory council to advise the POB on issues related to
its agenda, new agenda items, project priorities, and related matters.
(Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter does not provide for establishing an
advisory council. The charter does provide for the POB to hold an annual
outreach meeting to solicit views and recommendations about the
accounting profession's self-regulatory program and the POB's oversight
process.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 5.2) The POB should appoint the council
members, whose service should be limited to two 3-year terms.
(Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter does not provide for establishing an
advisory council.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 5.3) The council should comprise 9 to 15
people selected from the constituencies that are concerned with audit
quality and financial matters, thus the broadest spectrum of
participants in the self-regulation of the auditing profession.
(Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter does not provide for establishing an
advisory council.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 5.4) Council members should serve on a
voluntary, part-time basis and be available to meet with the POB at
regularly scheduled intervals (e.g., two to four times a year).
(Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter does not provide for establishing an
advisory council.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 6.1) The POB charter should address
establishing a coordinating task force of the chairs of each body
within the POB's oversight. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter provides that the POB may have a
Coordinating Task Force which would be a standing committee consisting
of the chairs of each body within the POB's oversight or their designees
and which would be responsible for exchanging information relating
to each body's activities. Footnote 19 of the charter provides for the
POB to monitor the agenda of the SEC and the PEEC to identify rule-
making, regulatory, and standard-setting activities that relate to the
audit of public companies for the purpose of communicating information
relating to such activities to the Coordinating Task Force for
appropriate consideration.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 6.2) The coordinating task force should
meet periodically (e.g., two to four times a year) to ensure effective
communications among bodies subject to POB oversight. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter provides for the coordinating task
force to meet periodically, but at least semiannually.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 7.1) The POB charter should address its
authority to commission special reviews related to significant
professional matters that affect the public's confidence in the
profession. (Paragraph 6.25);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter provides authority for the POB to
take any action related to its oversight activities, including
authorizing any oversight reviews it may determine to be appropriate in
order to carry out its responsibilities, while noting the factor of
confidentiality and having consulted with the SECPS Executive
Committee. In that respect, the charter further provides among the POB
activities that it may conduct oversight reviews and undertake other
projects and actions, after consulting the SECPS Executive Committee, on
matters covered by the POB's activities that the POB deems appropriate
to protect the public interest.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 8.1) The POB, SEC, AICPA, SECPS, and major
firms should promptly agree to a charter for the POB. (Paragraph 6.26);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter is dated February 2, 2001. The POB
issued an accompanying news release stating that the POB and the AICPA
have formally approved the charter after extensive discussions between
both organizations, the SECPS, the large auditing firms, and the SEC.
The AICPA Board of Directors passed a resolution dated February 9,
2001, stating that it approves the proposed POB charter dated February
2, 2001 and that it recognizes the good work of the POB and that it
looks forward to many more years of the POB's observations and comment.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 9.1) The POB charter should address the
POB's role in the appointment of the chairs of the ASB and the SECPS
Executive Committee. (Paragraph 6.26);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: See above comment that describes the POB's consultive
role rather than appointment authority.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 10.1) The POB charter should address the
procedures for amending the charter. (Paragraph 6.26);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: The POB's charter provides that the charter may be
amended by a vote of two-thirds of members in office at a meeting duly
called for that purpose, with the concurrence of the AICPA Board.
Recommendations Related to the POB Charter Contained in the Panel on
Audit Effectiveness Report: 11.1) The draft charter should include a
provision for the POB to conduct an annual "outreach" meeting with
representatives from the constituencies that are concerned with audit
quality and financial reporting matters rather than establishing a
nominating committee and advisory council. The Panel recommends that
this issue be addressed in three years as part of the POB's review of
the effectiveness of the self-regulatory oversight process as
contemplated in the draft charter. (Paragraph 6.26);
Provisions in the POB’s Charter Responding to the Panel’s
Recommendations: See above comments that describe that the POB's
charter provides for an annual outreach meeting and establishing a
nominating committee, but does not include an advisory council. The
POB's charter provides for the POB to arrange for a review and issuance
of a written report by a panel containing an evaluation of the
effectiveness of the POB's oversight role and process at the end of
three years after the adoption of the charter and periodically
thereafter, for purposes of evaluating the POB's accountability. The
report is to include a review of the effectiveness of the annual
outreach meeting provided for in section VIII.H of the charter and
whether this annual outreach meeting alleviates the need for an
advisory council.
[End of table]
[End of section]
Appendix II: Actions Responding to Panel on Audit Effectivesness’
Recommendations:
Issue: Governance System:
Findings From Panel Report: 1) There is a lack of sufficient public
representation on the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 1.1) The POB should have a
majority of public members whose primary responsibility is to serve the
public. (Paragraph 6.20)[A];
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB consists of 5 members, all of whom are public
members with a broad spectrum of business, professional, regulatory,
and legislative experiences.
Recommendations Directed to: POB.
Findings From Panel Report: 1) There is a lack of sufficient public
representation on the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 1.2) The constituencies (both
practitioners and non-practitioners) represented on the ASB remain
unchanged; however, at least a majority of the members represented on
the ASB should be from CPA firms that provide attest services to SEC
clients. (Paragraph 6.31);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): A majority of the members represented on the ASB provide
attest services to SEC clients. The ASB is a 15-member board, all of
whom are CPAs, comprising representatives from each of the Big 5 firms,
2 members from other national firms, 6 non-national firm
representatives, 1 representative from academia, and 1 representative
from a government audit position.
Recommendations Directed to: AICPA.
Findings From Panel Report: 1) There is a lack of sufficient public
representation on the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 1.3) The ISB should
reconstitute its membership to include four members representing the
public and three members representing the public accounting profession.
(Paragraph 6.35);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The ISB ceased operations in July 2001.
Recommendations Directed to: ISB.
Findings From Panel Report: 1) There is a lack of sufficient public
representation on the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 1.4) ISB’s public members
should retain responsibility for the selection of their replacements,
with the POB being consulted on the selections.(Paragraph 6.35);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The ISB ceased operations in July 2001.
Recommendations Directed to: ISB.
Findings From Panel Report: 1) There is a lack of sufficient public
representation on the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 1.5) Two of the members of
the ISB that are representing the public accounting profession should
be selected by the SECPS Executive Committee from member firms, with
the third member continuing to be the AICPA president or his or her
designee. (Paragraph 6.35);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The ISB ceased operations in July 2001.
Recommendations Directed to: ISB.
Findings From Panel Report: 1) There is a lack of sufficient public
representation on the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 1.6) The ISB should retain
sole authority to determine its budget and other resources. (Paragraph
6.35);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The ISB ceased operations in July 2001.
Recommendations Directed to: ISB.
Findings From Panel Report: 1) There is a lack of sufficient public
representation on the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 1.7) The ISB should retain
its staff and the responsibility for their hiring, supervision, and
compensation. (Paragraph 6.35);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The ISB ceased operations in July 2001.
Recommendations Directed to: ISB.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.1) The POB should oversee
the profession's activities with respect to standard setting,
monitoring, discipline, and special reviews. The POB should oversee the
ASB, the ISB, the SECPS Executive Committee, QCIC, the SECPS Peer
Review Committee, the Professional Issues Task Force, the SEC
Regulations Committee, and the standard-setting activities of the PEEC
that relate to audits of public companies. (Paragraph 6.23);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB Charter gives the POB oversight responsibilities
for the ASB, and maintains its oversight responsibility for the SECPS
Executive Committee, QCIC, Peer Review Committee, PITF, and the SEC
Regulations Committee. The ISB has recently been dissolved; accordingly
there will be no POB oversight. The POB charter does not give POB
oversight of PEEC, however, the POB staff attend all PEEC meetings
and monitor the agendas and activities of the PEEC.
Recommendations Directed to: POB, AICPA, SECPS.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.2) The POB should report
periodically to the public regarding its activities. (Paragraph
6.20)[A];
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB issues an annual report that discloses its
activities.
Recommendations Directed to: POB.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.3) The POB should maintain
independence from both the profession and the regulatory authorities.
(Paragraph 6.20)[A];
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB’s new charter discloses that the POB was created by
the AICPA, in consultation with the SEC, as an independent board. The
charter stresses that the POB's role is oversight and not management.
Members and staff of the POB must abide by the POB's Conflict of
Interest Guidelines.
Recommendations Directed to: POB.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.4) The POB, AICPA, SECPS,
and SEC should work together to create and implement a formal charter
for the POB that would include the responsibilities and powers
enumerated in the Panel's report. The POB, AICPA, SECPS, SEC, and major
firms should agree to the charter and cooperate in facilitating its
implementation. (Paragraphs 6.24 and 6.26);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB and the AICPA’s Board of Directors adopted the
charter in February 2001, after discussions with the SEC, the SECPS,
and the large auditing firms. Refer to Appendix I for an analysis of
the POB’ s charter.
Recommendations Directed to: POB, AICPA, SECPS, SEC, and major firms.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.5) The POB should enhance
its resources in order to implement the POB's expanded oversight role.
The augmented staff would assist the POB in overseeing peer reviews of
the largest firms. (Paragraph 6.29);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB hired additional staff members (from 6 staff in
1999 to 13 staff in 2002) and has increased its budget (from $2.5
million in 1999 to $3.5 million in 2002) in order to implement its
expanded oversight role.
Recommendations Directed to: POB.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.6) The POB should review
its charter periodically to ensure its continuing adequacy, and, if
appropriate, work with the AICPA, SECPS, and SEC to amend it.
(Paragraph 6.29);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB plans to review and reassess its charter on a
periodic basis to assure its continuing adequacy and relevancy in the
light of changing circumstances and, if appropriate, take steps to
amend it. The charter may be amended by a vote of two-thirds of members
in office at a meeting duly called for that purpose, with the
concurrence of the AICPA Board.
Recommendations Directed to: POB.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.7) The POB should review
periodically the effectiveness of the ASB, ISB, SECPS, and other groups
that it oversees and include its findings and conclusions in its Annual
Report. (Paragraph 6.29);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB's new charter includes responsibility for reviewing
the effectiveness of these groups and reporting the results of its
reviews in its annual report. The ISB ceased operations in 2001.
Recommendations Directed to: POB.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.8) The POB should
summarize in its Annual Report the status of all AICPA Ethics Division
investigations of audits of SEC registrants when the civil litigation
and public regulatory investigations have been concluded. (Paragraph
6.29);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB plans to include in its next annual report summary
statistics of the (i) status of all AICPA Professional Ethics Division
investigations on audits of SEC registrants when the civil litigation
and public regulatory investigations have been published and concluded;
and (ii) the actions taken by and reported to the POB by SECPS member
firms with respect to the foregoing.
Recommendations Directed to: OB.
Findings From Panel Report: 2) There is a lack of unified leadership of
the various self-regulatory bodies. (Paragraph 6.15);
Recommendations Contained in Panel Report: 2.9) The POB should increase
its public communications to expand the public's awareness of the POB,
its activities, and its value to the capital markets. (Paragraph 6.29);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB will hold an annual meeting open to the public, and
will also issue an annual report and make public such other written
reports as the POB may deem necessary with respect to its activities.
The POB will also hold an annual outreach meeting to solicit views and
recommendations about the accounting profession's self-regulatory
program and the POB's oversight process.
Recommendations Directed to: POB.
Findings From Panel Report: 3) There are constraints on effective
communications with the SEC and among the various entities in the
current system. (Paragraph 6.15);
Recommendations Contained in Panel Report: 3.1) The POB should serve as
an oversight body to whom the SEC, the state boards of accountancy, the
auditing profession, and the public should look to for leadership. This
leadership position is intended to enhance communications among the
profession's self-regulatory bodies in order to facilitate the
profession's continuous improvement efforts and identify and resolve
important issues on a timely basis. (Paragraph 6.23).
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB charter includes expanded responsibility for
improving communication among the various bodies that make up the self-
regulatory system. A Coordinating Task Force has been created and the
POB will hold an Annual Meeting open to the public. The POB will also
hold an annual outreach meeting to solicit views and recommendations
about the accounting profession’s self-regulatory program and the POB’s
oversight process. This meeting may include, among others as
appropriate, representatives from the private sector, accounting
profession, government, professional organizations and public.
Reference to such meetings will be made in the POB’s annual report. The
POB will also establish liaisons with national and international
organizations regarding setting national and international auditing and
independence standards, and other matters relevant to the cooperative
self-regulation of the profession.
Recommendations Directed to: POB, AICPA, SECPS, and SEC.
Findings From Panel Report: 3) There are constraints on effective
communications with the SEC and among the various entities in the
current system. (Paragraph 6.15);
Recommendations Contained in Panel Report: 3.2) The POB and SEC should
acknowledge the need to maintain a continuing dialogue that will foster
a cooperative relationship, protect and enhance mutual respect and
confidence, and increase the public's respect for the profession and
its role in the capital markets. (Paragraph 6.27);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The SEC recently met with the POB in one of its first
outreach meetings. The POB stated that it meets frequently with the
staff of the SEC Chief Accountant’s office and other SEC staff as deemed
necessary to discuss issues of concern to the SEC.
Recommendations Directed to: POB and SEC.
Findings From Panel Report: 3) There are constraints on effective
communications with the SEC and among the various entities in the
current system. (Paragraph 6.15);
Recommendations Contained in Panel Report: 3.3) The POB and state
boards of accountancy, perhaps through the National Association of
State Boards of Accountancy, should determine how best to facilitate
meaningful continuing dialogue between the POB and state boards.
(Paragraph 6.28);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB plans to meet occasionally with the individual
state boards of accountancy and also to have ongoing discussions with
NASBA, as the representative of the state boards.
Recommendations Directed to: POB and state boards of accountancy.
Findings From Panel Report: 3) There are constraints on effective
communications with the SEC and among the various entities in the
current system. (Paragraph 6.15);
Recommendations Contained in Panel Report: 3.4) Restore the
relationship between the profession and the SEC to its historic level
of candor, trust, and respect. (Paragraphs 6.64 and 6.20)[A];
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The AICPA and SEC have enjoyed a longstanding working
relationship with the mutual goal of protecting the public interest.
The AICPA is committed to continually strengthen the profession’s self-
regulatory activities through a cooperative working relationship with
the SEC.
Recommendations Directed to: SEC and the accounting profession
(including the POB).
Findings From Panel Report: 3) There are constraints on effective
communications with the SEC and among the various entities in the
current system. (Paragraph 6.15);
Recommendations Contained in Panel Report: 3.5) The SEC should
encourage and support the ISB in carrying out its mission, recognizing
that the SEC retains ultimate authority over auditor independence with
respect to SEC registrants. (Paragraph 6.36);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The ISB ceased operations in July 2001.
Recommendations Directed to: SEC.
Findings From Panel Report: 3) There are constraints on effective
communications with the SEC and among the various entities in the
current system. (Paragraph 6.15);
Recommendations Contained in Panel Report: 3.6) The SEC should support
the IIC and work with the ISB to clarify the IIC's role. (Paragraph
6.36);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The ISB ceased operations in July 2001.
Recommendations Directed to: SEC.
Findings From Panel Report: 3) There are constraints on effective
communications with the SEC and among the various entities in the
current system. (Paragraph 6.15);
Recommendations Contained in Panel Report: 3.7) The SEC should assist in
implementing the POB's activities contemplated by the charter. Paragraph
6.36);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): According to the SEC, it has cooperated with the AICPA and
others on the disbanding of the ISB, and met with the AICPA’s SEC
Regulations Committee to discuss items of mutual interest. Further
meetings are scheduled with other AICPA committees. The SEC also
recently met with the POB in one of its first outreach meetings. The
SEC staff speaks at various AICPA conferences, including the SEC
Developments Conference. The SEC also anticipates further meetings with
the AICPA and POB in the coming months.
Recommendations Directed to: SEC.
Findings From Panel Report: 3) There are constraints on effective
communications with the SEC and among the various entities in the
current system. (Paragraph 6.15);
Recommendations Contained in Panel Report: 3.8) The SEC should support
the POB's authority as enumerated in its charter to enable the POB to
serve as an independent, effective, unifying leader of the profession's
voluntary self-regulatory process. (Paragraph 6.36);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): See action taken to recommendation 3.7 above.
Recommendations Directed to: SEC. SEC.
Findings From Panel Report: 4) There are differing interests and
divergent views of the AICPA's priorities on the part of its diverse
members. (Paragraph 6.15);
Recommendations Contained in Panel Report: 4.1) The AICPA should
provide the resources necessary for the ASB to meet its mandates.
(Paragraph 6.31);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The AICPA has provided and is committed to providing the
financial and human resources necessary for the ASB to meet its
mandates. There are continual and close communications between the
chair of the ASB and AICPA staff regarding the assignment of staff to
projects. The major financial components are for staff salaries, member
compensation, and reimbursements for meeting and travel expenses. The
major human resource components are volunteer hours and paid staff.
Staff salaries are adjusted annually to be competitive for the skills
the staff member possesses. Turnover of ASB staff has been very low.
Meeting and travel expenses are budgeted based on current and expected
projects.
Recommendations Directed to: AICPA.
Findings From Panel Report: 4) There are differing interests and
divergent views of the AICPA's priorities on the part of its diverse
members. (Paragraph 6.15);
Recommendations Contained in Panel Report: 4.2) The AICPA should
provide the resources necessary for the SECPS to meet its staffing
needs, including providing QCIC with the resources needed to enable it
to act quickly in investigating alleged audit failures and thereby
preserve the candid dialogue with SECPS member firms that presently
adds to the effectiveness of the QCIC process. (Paragraph 6.31);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The AICPA has provided and is committed to providing the
financial and human resources necessary for the SECPS, including the
QCIC, to meet its mandates. There are continual and close
communications between the chair of the SECPS, QCIC and AICPA staff
regarding the assignment of staff to projects. The major financial
components are for staff salaries and reimbursements for meeting and
travel expenses. The major human resource components are volunteer
hours and paid staff. Staff salaries are adjusted annually to be
competitive for the skills the staff member possesses. Meeting and
travel expenses are budgeted based on current and expected projects.
Recommendations Directed to: AICPA.
Findings From Panel Report: 4) There are differing interests and
divergent views of the AICPA's priorities on the part of its diverse
members. (Paragraph 6.15);
Recommendations Contained in Panel Report: 4.3) The ASB, SECPS, and
PEEC staffs remain employees of the AICPA. (Paragraph 6.31);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): ASB, SECPS, and PEEC staff are AICPA employees.
Recommendations Directed to: AICPA.
Findings From Panel Report: 4) There are differing interests and
divergent views of the AICPA's priorities on the part of its diverse
members. (Paragraph 6.15);
Recommendations Contained in Panel Report: 4.4) The SECPS Executive
Committee retains its responsibility for approving members of the PRC,
QCIC, the SEC Regulations Committee, and the PITF; the preceding four
groups continue to report to the Executive Committee; and the SECPS
continues to fund the ISB. (Paragraph 6.32);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The SECPS Executive Committee has the responsibility for
approving members of the PRC, QCIC, SEC Regulations Committee, and the
PITF. These groups continue to report to the SECPS Executive Committee.
The SECPS continued to fund the ISB until it ceased operations in July
2001.
Recommendations Directed to: SECPS.
Findings From Panel Report: 4) There are differing interests and
divergent views of the AICPA's priorities on the part of its diverse
members. (Paragraph 6.15);
Recommendations Contained in Panel Report: 4.5) The QCIC should
establish a panel of industry specialists and experts and specialists
whose members would be drawn from practicing profession and industry
and who would be available to QCIC members and the POB and SECPS staffs
for consultation on various matters, such as industry issues and the
application of accounting standards. (Paragraph 6.33);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The QCIC maintains an inventory of QCIC member industry and
technical skills. In the event that a QCIC, POB, or SECPS staff member
responsible for a particular review considers consultation outside the
review team to be necessary, the first consultation source is with
another QCIC member with identified industry skills. The review team
initiates consultation beyond QCIC membership. This consultation is
coordinated by the SECPS staff through contact with the Big-5 firm
representative of the SECPS Executive Committee. The Executive
Committee member identifies a specific experienced and highly qualified
partner within his or her firm to consult with the review team.
Recommendations Directed to: SECPS QCIC.
Findings From Panel Report: 4) There are differing interests and
divergent views of the AICPA's priorities on the part of its diverse
members. (Paragraph 6.15);
Recommendations Contained in Panel Report: 4.6) Each member firm should
ensure that its representative on the SECPS Executive Committee has
sufficient authority and responsibility to commit the firm to the
protection of the public interest when this conflicts with a more
favorable business position, and ensure that the public interest
remains the paramount objective in the representative's decision
making and voting. (Paragraph 6.34);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): All members of the Executive Committee have sufficient
authority to commit their firms to the protection of the public
interest, and each representative has the public interest as the
paramount objective in fulfilling his or her committee obligations. In
selecting committee member replacements, the SECPS staff and the
Executive Committee review resumes of prospective members prior to
appointment and all nominations are made in consultation with the POB.
(See POB charter section VII.A.1.c.)
Recommendations Directed to: Member firms of the SECPS represented
on the SECPS Executive Committee.
[A] This was not a formal recommendation in the Panel’s report;
however, this was mentioned in the text of the Panel’s report.
Issue: Peer Review:
Findings From Panel Report: 5) The peer review reporting model should
be more transparent in order to better facilitate the communication of
matters identified during peer reviews that should be addressed by the
reviewed firm and the profession. (Exhibit 4, page 4);
Recommendations Contained in Panel Report: 5.1) The PRC should revise
the standard peer review report to more fully describe the peer review
process and matters relevant to the specific peer review. (Task Force
Recommendation 2a.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The peer review reporting standards were revised, effective
for peer reviews completed on or after June 30, 2001, to more fully
describe the peer review process and to streamline the reporting of
matters relevant to the specific peer review. Specifically, to assist
users of the peer review report in understanding the peer review
process, each report is now accompanied by an attachment that provides
the following: The objectives of a peer review. An overview of the peer
review process, including how peer reviews are planned and performed
and the roles of the PRC, POB, and the public file. In the case of a
modified report, readers will no longer have to refer to the letter of
comments to understand the reasons for the modification. Both the
reasons and the recommendations to cure deficiencies are now in the
report itself. The reviewed firm's response will address the
deficiencies and recommendations in both the report and the letter of
comments. In the case of an adverse report, all of the deficiencies
identified are required to be included in the peer review report. The
reviewed firm’s response will address the deficiencies and
recommendations identified in the report. The PRC also reviewed the
SECPS peer review standards that address the specific matters to be
reported as a result of a peer review. The PRC concluded, and the POB
staff concurred, that no changes to the criteria set forth in the
Standards were needed.
Recommendations Directed to: PRC.
Findings From Panel Report: 6) The PRC needs to consistently consider
the sufficiency and adequacy of the information it receives concerning
peer review results in order to perform its function effectively.
(Exhibit 4, page 4);
Recommendations Contained in Panel Report: 6.1) The SECPS should study
whether there are key quantitative and qualitative performance
indicators that would be useful to users of SECPS member firms' annual
reports or peer review reports. (Task Force Recommendation 1b.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): To date, the SECPS Executive Committee and PRC have not
been able to identify indicators that are relevant, objective, or
measurable. However, the PRC has established a standing task force to
continuously consider ways of improving the peer review process,
including the identification of such quantitative measures.
Recommendations Directed to: SECPS.
Findings From Panel Report: 6) The PRC needs to consistently consider
the sufficiency and adequacy of the information it receives concerning
peer review results in order to perform its function effectively.
(Exhibit 4, page 4);
Recommendations Contained in Panel Report: 6.2) Peer review reports
should be addressed to the reviewed firm and the PRC to emphasize that
peer reviewers and reviewed firms should consider the PRC as the "audit
committee." (Task Force Recommendation 2b.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): Effective for peer reviews completed on or after June 30,
2001, the peer review report will be addressed to both the reviewed
firm and the PRC.
Recommendations Directed to: PRC.
Findings From Panel Report: 6) The PRC needs to consistently consider
the sufficiency and adequacy of the information it receives concerning
peer review results in order to perform its function effectively.
(Exhibit 4, page 4);
Recommendations Contained in Panel Report: 6.3) Require a Summary
Observation Memorandum (SOM) be prepared on all peer reviews that
describes the peer reviewer's observations regarding best practices,
constructive suggestions that go beyond professional standards, and
matters for the attention of standard-setters. The SOM should be
submitted to the PRC. The SOM should not be made available for public
distribution, but should be used as a basis for preparing the PRC
annual report. (Task Force Recommendation 2c.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PRC is pilot testing a more qualitative, subjective
approach to the review of emerging issues and higher-risk areas during
the peer review process. It is expected that the findings from these
procedures will result in observations and recommendations regarding
best practices, constructive suggestions that go beyond professional
standards, and matters for the attention of standard-setters that can
be included in a SOM. The SOMs for all of the peer reviews performed
during the year and significant, recurring findings in peer review
reports and letters of comments will be the primary source for the
PRC's annual report. The SOMs will not be publicly distributed.
Recommendations Directed to: PRC.
Findings From Panel Report: 6) The PRC needs to consistently consider
the sufficiency and adequacy of the information it receives concerning
peer review results in order to perform its function effectively.
(Exhibit 4, page 4);
Recommendations Contained in Panel Report: 6.4) SECPS and POB staff
should compile data from their oversight of peer reviews and QCIC
investigations that will enhance the diagnostic value of the peer
review and QCIC findings to standard setters and audit firms. For
example, data on disciplinary measures taken by member firms resulting
from substandard performance; data on the audit firms' fraud risk
assessments and related responses on audits where fraud is subsequently
discovered; data related to emerging issues that identify needed
modifications to professional standards or best practices guidance; and
data on nonaudit services provided to the audit clients encompassed by
peer reviews and QCIC investigations. (Paragraph 6.30);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The SECPS has provided information to the POB regarding
QCIC and peer review activities for reporting in its annual report. The
QCIC has and continues to report its findings to standard-setters as
well as to the PITF. (The PITF issues Practice Alerts that are
disseminated through the CPA Letter and Technical Practice Aids to CPAs
in public practice.) Starting in 2001, QCIC staff automated its
previous manual information database to assist in analyzing issues that
should be brought to the attention of standard-setters and the PITF.
The POB intends to monitor the preparation and analysis of the
information contained in this database and comment on the monitoring
process in its annual report. The PRC is pilot testing an enhanced peer
review process, a by-product of which is to develop recommendations to
standard-setters and audit firms (see actions taken in recommendation
6.3 above regarding preparation of an SOM).
Recommendations Directed to: SECPS and POB.
Findings From Panel Report: 7) Any changes to the peer review reporting
model need to continue to provide appropriate access to information for
SEC staff to assess the effectiveness of the peer review program.
(Exhibit 4, page 4);
Recommendations Contained in Panel Report: 7.1) The SECPS should
continue to maintain a file that provides for public access to peer
review reports, letters of comments, and the firms' responses to the
letters of comments. (Task Force Recommendation 1a.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The SECPS has a file that provides for public access to
peer review reports, letters of comments, and the firms’ responses to
the letters of comments. The SECPS is in the process of converting the
public files to provide for electronic access to the information. The
website is expected to be fully operational in the fall of 2001.
Recommendations Directed to: SECPS.
Findings From Panel Report: 7) Any changes to the peer review reporting
model need to continue to provide appropriate access to information for
SEC staff to assess the effectiveness of the peer review program.
(Exhibit 4, page 4);
Recommendations Contained in Panel Report: 7.2) The SEC staff should
have access to the PRC annual report and to the SOM (described above
under recommendation 6.3 above) on a no-name basis. (Task Force
Recommendation 2c.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PRC annual report will be a public document, whose
primary recipients will be the accounting profession, standard-setters,
and regulators. The POB will have access to all SOMs and the SEC will
have access to all SOMs on a “no name” basis.
Recommendations Directed to: PRC.
Findings From Panel Report: 8) The peer review standards are common
to all SECPS member firms and do not provide for differences in firm
size and types of practices. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 8.1) There should be a
prescribed differentiation of the SECPS member firms, based on the
effectiveness and objectivity of the firms' internal inspection
programs. Tier A firms should be those that do not have an internal
inspection program that meets specifically defined criteria for a Tier
B firm. Tier B firms should be those firms that have an effective
internal inspection program that meets specifically defined criteria.
The effectiveness of a reviewed firm’s internal inspection program
should be determined by the peer reviewer. The PRC, with the POB’s
oversight, should concur with the classification of firms. (Task Force
Recommendation 3a.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PRC is pilot testing a two-tiered peer review program.
Tier B firms consist of larger member firms meeting certain size
criteria, i.e., firms with 30 or more SEC clients and 100 or more
accounting and auditing professionals. Those firms are required to
have an effective internal inspection. Tier B firms are being subjected
to a continuous review process with prescribed procedures being
performed during the interim 2 years between peer review public
reporting years. All other SECPS member firms are considered Tier A
firms and are not subject to the continuous review process.
Recommendations Directed to: PRC.
Findings From Panel Report: 8) The peer review standards are common
to all SECPS member firms and do not provide for differences in firm
size and types of practices. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 8.2) The peer reviews of
Tier A firms should be systems- and compliance-oriented but place
greater emphasis on the reviews of engagements, while the peer reviews
of Tier B firms should involve reviews of engagements but place greater
emphasis on systems and compliance. (Task Force Recommendation 3b.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The peer review procedures for the Tier B firms are being
better integrated with the firm's internal inspection programs and the
reviews of some engagements were enhanced to generate more qualitative,
subjective, and judgmental considerations and findings by the
reviewers. The approach being tested includes: obtaining an in-depth
understanding of the engagement team's approach to the audit and their
knowledge, skills, training, and experience; developing observations
regarding the quality of the engagement team's performance in certain
areas prescribed by the PRC, including both best practices and areas for
improvement; assessing the engagement team's application of the firm's
policies, guidance, procedures, and practice aids, including best
practices and areas for improvement; and providing recommendations that
would improve the firm's policies, guidance, procedures, practice aids,
or training programs and/or professional standards. Peer review
standards for Tier A firms will be more compliance oriented and place
greater emphasis on the reviews of engagements.
Recommendations Directed to: PRC.
Findings From Panel Report: 8) The peer review standards are common
to all SECPS member firms and do not provide for differences in firm
size and types of practices. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 8.3) Tier B firms should be
required to engage their peer reviewers to annually perform certain
limited review procedures, in addition to the peer review performed
on a triennial basis. (Task Force Recommendation 3c.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): As indicated above, Tier B firms will engage their peer
reviewers to perform certain limited review procedures developed by the
PRC in the years they are not subjected to their triennial reviews.
These limited review procedures will result in reports to the PRC, with
oversight by the POB and SEC access. A full scope peer review continues
to be required on a triennial basis, with a report available to the
public.
Recommendations Directed to: PRC.
Findings From Panel Report: 8) The peer review standards are common
to all SECPS member firms and do not provide for differences in firm
size and types of practices. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 8.4) The POB should conduct
oversight of the annual limited procedures engagement discussed in
recommendation 8.3 above. (Task Force Recommendation 3c.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB will conduct on-site oversight of the Tier B firms’
annual reviews.
Recommendations Directed to: POB.
Findings From Panel Report: 8) The peer review standards are common
to all SECPS member firms and do not provide for differences in firm
size and types of practices. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 8.5) The triennial peer
review for Tier B firms should be integrated with the reviewed firm's
internal inspection program in that year and focus on emerging issues
and higher-risk areas, while relying on the internal inspection to
review routine and compliance areas. The reviewed firm's internal
inspection program should become an integral part of the peer review in
that the peer reviewer should review and approve the inspection review
procedures, review materials and questionnaires, and office and
engagement selections made for the inspection program, and form joint
teams of internal inspectors and peer reviewers for certain reviewed
offices. (Task Force Recommendation 3d.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): Under the pilot test program, the PRC is testing different
approaches to integrating peer review and the reviewed firm’s internal
inspection program.
Recommendations Directed to: PRC.
Findings From Panel Report: 9) The peer review process should place
greater emphasis on assessing auditor performance (versus evaluating
documentation) to determine compliance with quality control systems and
professional standards. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 9.1) The review materials and
questionnaires should be revised to generate more qualitative,
subjective, and judgmental considerations and findings by peer
reviewers. Peer reviewers should also conduct focus group sessions with
professional personnel at various levels in the organization in order
to obtain candid feedback regarding critical matters pertaining to the
accounting and auditing practice. (Task Force Recommendation 3e.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): In addition to the matters described above, the pilot test
program includes using supplemental checklists at the firm level and
for some engagement reviews that address certain emerging/high-risk
areas identified by the PRC, and conducting focus group sessions in
some offices being reviewed that include separate groups of seniors and
managers.
Recommendations Directed to: PRC.
Findings From Panel Report: 9) The peer review process should place
greater emphasis on assessing auditor performance (versus evaluating
documentation) to determine compliance with quality control systems and
professional standards. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 9.2) The SECPS should
emphasize the types of issues described in the Panel’s report that
affect audit quality, including the more judgmental and less objective
issues, such as the "tone at the top." (Paragraph 6.40);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): See actions described in response to findings 6, 8, and 9
that are being pilot tested during 2001.
Recommendations Directed to: SECPS.
Findings From Panel Report: 9) The peer review process should place
greater emphasis on assessing auditor performance (versus evaluating
documentation) to determine compliance with quality control systems and
professional standards. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 9.3) The SECPS should
increase the emphasis on which professionals perform various aspects of
the audit, including who makes the risk assessments, and whether they
have the necessary knowledge and skills. (Paragraph 6.40);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The pilot test program includes placing increased emphasis
on interviewing members of the engagement teams whose audits are being
reviewed.
Recommendations Directed to: SECPS.
Findings From Panel Report: 9) The peer review process should place
greater emphasis on assessing auditor performance (versus evaluating
documentation) to determine compliance with quality control systems and
professional standards. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 9.4) The SECPS should require
additional qualitative evaluations of the information obtained during
peer reviews (e.g., assess whether management’s representations and
responses to inquiries were adequately corroborated; assess adequacy of
the training materials distributed and available to all professionals).
(Paragraph 6.40);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The peer review process has historically included
qualitative evaluations of the information obtained during peer reviews,
such as review of working papers for corroboration of management’s
representations. However, one of the objectives of the pilot test,
through more in-depth interviews of the engagement team, is to enable
the peer reviewers to be in a better position to assess this element of
the audit rather than just relying on reviewing working papers. See
actions described in recommendation 8.2 above that are being pilot
tested during 2001.
Recommendations Directed to: SECPS.
Findings From Panel Report: 9) The peer review process should place
greater emphasis on assessing auditor performance (versus evaluating
documentation) to determine compliance with quality control systems and
professional standards. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 9.5) The SECPS should
develop specific performance measures to be included in the peer review
report that relate to the quality of the firm's practice/effectiveness
of audits. (Paragraph 6.40);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): See actions described above to finding 6.
Recommendations Directed to: SECPS.
Findings From Panel Report: 9) The peer review process should place
greater emphasis on assessing auditor performance (versus evaluating
documentation) to determine compliance with quality control systems and
professional standards. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 9.6) The SECPS should
include in a peer review the business aspects of the reviewed firm's
practice that are closely related to the firm's professional practice.
(Paragraph 6.40);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): For the most part, peer reviewers don’t include the
business aspects of the reviewed firm’s practice in a peer review.
However, there are elements of this in current peer reviews, for
example, when a peer reviewer considers whether sufficient time was
devoted to the audit or specific audit areas. This was then expanded
with the pilot by way of the focus group sessions (see recommendation
9.1 above) because many of the topics relate to operational issues such
as sufficiency of staffing, time being devoted to audit areas, emphasis
on achieving time budgets, emphasis on training, etc. that are important
matters to consider by the peer reviewer.
Recommendations Directed to: SECPS.
Findings From Panel Report: 9) The peer review process should place
greater emphasis on assessing auditor performance (versus evaluating
documentation) to determine compliance with quality control systems and
professional standards. (Exhibit 4, page 5);
Recommendations Contained in Panel Report: 9.7) The SECPS should
require a review of the peer-reviewed firm’s review of selected
financial reports/filings of foreign registrants that are audited by
the firm’s reviewed foreign-associated firms and for which the reviewed
firm reviews the filing in accordance with the membership requirements
of the SECPS. The peer reviews should include interviewing the "filing
reviewers." (Paragraph 6.40);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): According to the AICPA, this recommendation cannot be
implemented because it is directed at foreign registrants who are not
clients of the SECPS member firms (i.e., U.S. firms). However, the PRC
has approved changes to the peer review standards and the related peer
review guidance materials to test a firm's compliance with the SECPS
membership requirement pertaining to an SECPS member firm with foreign
associated firms that audit SEC clients.
Recommendations Directed to: SECPS.
Findings From Panel Report: 10) Measures to enhance peer reviewer
independence and objectivity should be implemented. (Exhibit 4, page
7);
Recommendations Contained in Panel Report: 10.1) The PRC should limit
the peer review team captains for the reviews of Tier B firms to two
consecutive reviews of the same firm and a total of three consecutive
reviews as an engagement team member. (Task Force Recommendation
4a.i.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PRC will revise the peer review standards to limit the
team captains of Tier B firms to two consecutive triennial peer reviews.
Recommendations Directed to: PRC.
Findings From Panel Report: 11) The current protocols among the PRC,
POB, SEC, and peer reviewers should be enhanced. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 11.1) The PRC should require
the peer review captains for the reviews of Tier B firms to participate
in a meeting (exit conference) with the SEC staff and POB staff when
the SEC staff reviews the firm's peer review working papers to discuss
significant matters considered by the SEC staff during their oversight.
(Task Force Recommendation 4a.ii.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PRC will revise the peer review standards to require
the team captains of Tier B firms to participate in a meeting with SEC
and POB staff to discuss significant matters considered by the SEC
staff during its oversight of the peer review process.
Recommendations Directed to: PRC.
Findings From Panel Report: 11) The current protocols among the PRC,
POB, SEC, and peer reviewers should be enhanced. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 11.2) The PRC should prepare
an annual report for the profession, standard-setters, regulators, and
others that describes significant matters noted during peer reviews
conducted during the year to facilitate timely identification of matters
that require the attention of these groups. (Task Force Recommendation
4b.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): See actions described in recommendation 6.3 above that are
being pilot tested during 2001.
Recommendations Directed to: PRC.
Findings From Panel Report: 11) The current protocols among the PRC,
POB, SEC, and peer reviewers should be enhanced. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 11.3) The PRC should
determine a more formal means of identifying emerging issues and higher-
risk areas in a timely manner, and providing frequent updates or
supplements to the review materials and questionnaires used to perform
peer reviews. (Task Force Recommendation 4c.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PRC has established a standing task force to, among
other things, identify on a yearly basis the emerging/high-risk issues
to be addressed by peer reviewers in the upcoming peer review cycle.
The task force will also be responsible for updating the peer review
guidance materials accordingly. In addition, the Chair of the PRC will
be a member of the POB’s newly formed Coordinating Task Force.
Recommendations Directed to: PRC.
Findings From Panel Report: 11) The current protocols among the PRC,
POB, SEC, and peer reviewers should be enhanced. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 11.4) The PRC should study
the cost vs. benefit of more frequent peer reviewer involvement for
Tier A firms in order to improve the effectiveness of the peer review
process for these firms. (Task Force Recommendation 4d.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): This recommendation will be considered by the PRC after
completion of the pilot test and standards revisions described above
that will be applicable mostly to Tier B firms.
Recommendations Directed to: PRC.
Findings From Panel Report: 11) The current protocols among the PRC,
POB, SEC, and peer reviewers should be enhanced. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 11.5) The PRC should
establish a more formal means for continuously pursuing better
approaches to performing peer reviews. (Task Force Recommendation 4e.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PRC has established a standing task force to, among
other things, be responsible for continuously reviewing the current peer
review process and identifying better approaches for performing and
reporting on peer reviews.
Recommendations Directed to: PRC.
Findings From Panel Report: 11) The current protocols among the PRC,
POB, SEC, and peer reviewers should be enhanced. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 11.6) The SECPS should make
clear to peer review team captains and reviewers that the POB, not the
firm being reviewed, is the primary client. (Paragraph 6.40);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): According to the AICPA, this recommendation cannot be
implemented since the PRC, not the POB, is responsible for maintaining
and administering the SECPS peer review program. The POB charter gives
the POB responsibility for overseeing the activities of the PRC. The
POB does not serve in a management capacity.
Recommendations Directed to: SECPS.
Findings From Panel Report: 12) Greater depth is needed by the POB in
overseeing the performance of peer reviews. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 12.1) The POB should perform
an in-depth review of its current approaches to overseeing the
performance of peer reviews (including reviewing the scope of the
reviews, evaluation, and resolution of issues identified during the
review, and communications of the results of the review) with the goal
of identifying ways of gaining more timely (i.e., oversight of the work
of the peer reviewers as it is being performed) and deeper involvement
(i.e., participation with a peer reviewer in some interviews of audit
engagement team members) by the staff and Board. (Task Force
Recommendation 5a.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB expanded its oversight of the peer review program
to include visiting more offices of the largest firms that are being
reviewed (5 offices vs. 3 or 4 offices) and will be spending more time
at those offices (5 days – 2 at the beginning of the review and 3 days
at the end –vs. 3 days at the end of the review). Under the pilot
program being tested in the 2001-2002 peer review year, each of the 13
largest firms will undergo continuous review which will involve some
level of peer review procedures every year (versus the previous
triennial review requirement). The POB will conduct on-site oversight
on all 13 firms’ reviews on a real-time basis. See action taken to
recommendation 12.3 below for what the POB’s oversight will cover.
Recommendations Directed to: POB.
Findings From Panel Report: 12) Greater depth is needed by the POB in
overseeing the performance of peer reviews. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 12.2) The POB should consider
establishing a process for obtaining additional expertise to assist the
POB staff, when necessary, in formulating the staff's views on
significant matters that occasionally arise during the performance of
peer reviews (i.e., to assist in evaluating matters where significant
differences of professional judgment exist between the peer reviewers,
reviewed firm, and/or POB staff). (Task Force Recommendation 5b.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB hired five recently retired partners who held
important quality control functions in their former firms to assist the
POB in conducting oversight of the SECPS, including oversight of the
peer reviews of the largest firms on a real-time basis.
Recommendations Directed to: POB.
Findings From Panel Report: 12) Greater depth is needed by the POB in
overseeing the performance of peer reviews. (Exhibit 4, page 7);
Recommendations Contained in Panel Report: 12.3) The POB should expand
its oversight throughout the peer reviews of the largest firms on a
"real-time" basis. The expanded oversight should cover, at a minimum,
reviewing the qualifications of the peer review firm and the review team
captain; attending all important meetings, focus groups, and interviews
with firm personnel; reviewing the draft peer review reports before
they are provided to others; and overseeing the planning of the review,
and the review of the internal inspection program; the practice office
and National office reviews; the debriefing of engagement reviewers at
the conclusion of the reviews; and resolution of issues that arise
during the reviews. (Paragraph 6.41);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The fiscal 2002 budget contemplates expending 4000 hours
for peer review oversight compared with 3000 hours spent overseeing the
2000-2001 peer review program. The POB has developed a document “SEC
Practice Section Oversight” that specifies its oversight objectives and
procedures with respect to the SECPS. The POB will continue to oversee
the planning of peer reviews, the reviews of functional areas at both
the national and practice offices, the reviews of the firms’ internal
inspection programs, and the wrap-up of the reviews. However, the POB
staff now will have more timely involvement on a real time basis in the
resolution of issues arising during the reviews. The POB will continue
to review the qualifications of the peer review firms and the review
team captains, and when it believes appropriate, make suggestions for
changes.
Recommendations Directed to: POB.
Findings From Panel Report: 13) The Statements on Quality Control
Standards (that provide that firms have a system of quality control)
lack specificity. (Exhibit 4, page 8);
Recommendations Contained in Panel Report: 13.1) The ASB, in
collaboration with the PRC and QCIC, should review the quality control
standards and make them more specific and definitive for firms with
public clients, especially for the largest firms. (Task Force
Recommendation 6; and paragraph 6.42);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The ASB has established a standing Quality Control
Standards Task Force with representatives from the ASB, QCIC, PRC, and
the AICPA Peer Review Board. The task force has preliminarily concluded
that: Statements on Auditing Standards (SASs), Statements on Standards
for Attestation Engagements (SSAEs), and Statements on Standards for
Accounting and Review Services (SSARSs) should be amended to clarify
the relationship between these standards and the Statements on Quality
Control Standards (SQCS). Guide for Establishing and Maintaining a
System of Quality Control for a CPA Firm’s Accounting and Auditing
Practice (Guide) should be revised to reflect (1) recently issued SQCSs
and (2) the POB Panel’s recommendation that the SQCSs be more specific
and definitive. (Because the SQCSs cover the entire spectrum of attest
services that are applicable to firms of all sizes, the task force
believes the POB recommendation can best be addressed and implemented
through more specificity to the Guide rather than the standards
themselves.) Through the process of updating the Guide, the task force
will also consider whether any guidance should be elevated from the
Guide to a standard.
Recommendations Directed to: SECPS and ASB.
Findings From Panel Report: 13) The Statements on Quality Control
Standards (that provide that firms have a system of quality control)
lack specificity. (Exhibit 4, page 8);
Recommendations Contained in Panel Report: 13.2) The ASB, PRC, and QCIC
should establish a mechanism for on-going monitoring of the standards
to keep them current. (Paragraph 6.42);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): A standing Quality Control Standards Task Force has been
established to monitor quality control standards and keep them current.
Recommendations Directed to: SECPS and ASB.
Findings From Panel Report: 14) The training courses and approach to
training peer review captains and teams should be improved. (Exhibit 4,
page 10);
Recommendations Contained in Panel Report: 14.1) The PRC should
establish a standing task force that will oversee the peer review
training programs to ensure that the training programs and methods of
delivering them meet the needs of the peer review program. (Task Force
Recommendation 7a.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): Members of the PRC and SECPS staff are now participating in
the activities of the Education and Communications Task Force of the
AICPA Peer Review Program. That Task Force is responsible for
developing and overseeing appropriate peer review training programs.
Recommendations Directed to: PRC.
Findings From Panel Report: 14) The training courses and approach to
training peer review captains and teams should be improved. (Exhibit 4,
page 10);
Recommendations Contained in Panel Report: 14.2) The PRC should develop
a system for evaluating the performance of team captains. The results
of such evaluations should be summarized on a periodic basis to
identify team captains who are not performing at an acceptable level so
that appropriate actions can be considered by the PRC. (Task Force
Recommendation 7b.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PRC implemented a more formal process for evaluating
and monitoring the performance of peer review team captains that
includes the completion of a written evaluation for each team captain
whose performance on a peer review was deemed to be ineffective or
unsatisfactory. POB staff provides input to these evaluations. The
results are periodically summarized for consideration by the PRC so
that appropriate actions can be taken.
Recommendations Directed to: PRC.
Findings From Panel Report: 15) A market-driven fee arrangement
between a Committee Appointed Review Team (CART) and a firm would
result in more qualified reviewers. (Exhibit 4, page 10);
Recommendations Contained in Panel Report: 15.1) The PRC should
discontinue setting rates for peer reviews conducted by CARTs. Fees for
participating in a CART review should be established by the firm being
reviewed and the members of the review team. (Task Force Recommendation
7c.);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): Effective April 1, 2001, the PRC discontinued allowing
CARTs to be formed.
Recommendations Directed to: PRC.
Findings From Panel Report: 16) Peer review is only required for SECPS
member firms. (Exhibit 4, page 2);
Recommendations Contained in Panel Report: 16.1) The SEC should mandate
that all firms that audit SEC registrants be enrolled in a peer review
program that includes public oversight. With respect to foreign-based
CPA firms, the requirement should extend to the peer review
programs/processes in their foreign locations. (Paragraph 6.43);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The costs versus the benefits of mandating that all firms
that audit SEC registrants join a peer review program would have to be
considered in deciding whether to implement this recommendation. A
previous SEC proposal to mandate such involvement was never adopted
due, in part, to such concerns.
Recommendations Directed to: SEC.
Issue: Disciplinary Process:
Findings From Panel Report: 17) The disciplinary system is perceived
to be slow and ineffective. (Paragraphs 6.15 and 6.52);
Recommendations Contained in Panel Report: 17.1) The following
procedures should be followed when civil litigation or a criminal or
public regulatory investigation contains allegations of an audit
failure: (1) Devote more resources to the QCIC to speed up the process.
(2) A firm should conduct an internal review of the subject engagement
to evaluate performance of the senior engagement personnel. The firm
should respond to a standard question from the QCIC and POB staff,
regarding whether the firm had conducted such a review. (3) The Ethics
Division should inform the firm that its consideration of the matter was
being deferred. (4) Upon notification by the Ethics Division regarding
deferral, the firm should select one of the following three options to
apply to the engagement partner during the period of deferral, if the
partner was still with the firm: (A) Terminate or retire the partner;
(B) Remove the partner from all public company audit engagements until
the Ethics Division's process is complete; (C) Perform an additional
second partner review of all public company audit engagements completed
by the partner in the 12 months prior to the deferral. The firm would
report the results of such review to both the QCIC and the POB, and
subject the partner to additional oversight on all public company audit
engagements for at least one year and thereafter subject the partner to
those additional oversight procedures that are determined necessary.
(5) The process implemented by SECPS member firms when they choose
Option C should be subject to peer review and oversight by the POB. At
least one engagement to which Option C is being applied should be a
mandatory selection in the firm’s peer review and annual inspection
program. If the POB disagrees with a member firm’s selection or method
of applying Option C, it should promptly make its views known to the
firm, SECPS committee representatives, and the SEC through its normal
communication channels, and to the public through its annual report and
other publications. (6) The POB should report on these activities in
its Annual Report on an aggregate no-name basis. (7) SECPS member firms
should apply one of the foregoing options to a professional that joins
a member firm while subject to one of the options at his or her former
firm. (8) The Ethics Division should refer matters to the QCIC that
involve financial reporting of an SEC registrant in which the SECPS
member firm has not been made a party, and the Ethics Division would
otherwise open an investigation. (9) If the matter ends without the
firm having been made a party, the QCIC would keep the case closed. If
the firm becomes a party at a later date, the QCIC reporting
requirement should be reduced to 15 days for the matter. (10) Once the
Ethics Division referral is lifted, the Ethics Division should expedite
its investigation of the matter. The AICPA should allocate additional
resources to both QCIC and the Ethics Division to enable both bodies to
perform their responsibilities promptly and effectively. (Paragraph
6.56);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The SECPS membership requirement (Procedures in Connection
with an Alleged Audit Failure) which became effective January 1, 2001,
requires SECPS member firms to have quality control policies and
procedures in place, so that, in the event of litigation alleging
deficiencies in the conduct of an audit of financial statements of a
present or former SEC client, the firms will report that matter to the
QCIC and follow other applicable procedures of the QCIC. These
procedures call for the member firm to conduct a review of the
engagement that is the subject of the litigation in order to evaluate
the performance of senior engagement personnel with respect to specific
issues contained in the complaint against the firm or individuals. The
QCIC will inquire whether the firm reviewed timely other public company
audits that such senior audit personnel completed within the preceding
12 months. The QCIC will review the matter, and for each case that is
closed by QCIC, the AICPA’s Professional Ethics Division is advised of
those cases for which it is believed there may be engagement personnel
issues of significance. The Ethics Division will assess whether or not
the performance-specific issues warrant investigation. If the Ethics
Division determines an investigation is appropriate, it will inform the
member firm of that and also that the investigation of the matter will
be deferred until the litigation is resolved. Once the member firm and
the audit engagement partner involved have been notified by the Ethics
Division that the matter is being deferred, then the firm must select
one of the following options to apply to the engagement partner during
the period of deferral, if that individual is still associated with the
firm: (A) terminate or retire the individual from the member firm, (B)
remove the individual from performing or supervising audits of public
companies until the Ethics Division's ethics enforcement process is
completed, or (C) subject the individual to additional, prescribed
oversight on all public company audit engagements in which she/he is
involved for at least 1 year. Additional oversight, for the purpose of
this membership requirement, is defined to mean for at least 1 year,
the individual will perform such audits subject to oversight by a
senior technical partner appointed by the member firm’s Managing
Partner/CEO. The senior technical partner oversight of such
engagements, at a minimum, will meet the SECPS’s concurring partner
review membership requirement, which in these circumstances, will
include timely involvement in significant planning activities, the
determination of risk assessments, and the designs of tests of controls
and substantive audit procedures. Thereafter, the individual must
remain under the additional oversight that the firm’s Managing
Partner/CEO determines, in light of that person’s evaluation of the
individual’s performance, is necessary to protect the public interest.
Implementation of the option chosen is subject to review through the
peer review process and by the POB. If the individual leaves the firm
and joins another SECPS firm, the successor firm must select one of the
three options. The Ethics Division and the QCIC staff recognize that it
is in the public interest to cooperate with each other to minimize
duplication of efforts, and are in constant communication regarding
matters that may or may not involve litigation against an auditor of an
SEC registrant. The Ethics Division and QCIC handle those matters that
do not involve litigation on a case-by-case basis. Once the Ethics
Division deferral is lifted, the Ethics Division expedites its
investigation of the matter. The AICPA has allocated additional
resources to both QCIC and the Ethics Division to enable both bodies to
perform its responsibilities promptly and effectively. The POB will work
with the PRC to develop peer review procedures to assure that (a) the
firm has procedures in place to reasonably assure its compliance with
the options chosen, and (b) the peer review and inspection programs
include the review of at least one engagement to which Option C was
applied. POB is in the process of establishing a system to accumulate
PEEC’s deferrals and the options chosen by the firms to apply to the
engagement partner during the PEEC’s deferral period. The POB intends
to report options chosen by the firms for those deferrals by the PEEC
on an aggregate “no-name” basis. The POB also oversees each QCIC case.
Recommendations Directed to: SECPS, AICPA, the POB, and audit firms.
Findings From Panel Report: 17) The disciplinary system is perceived
to be slow and ineffective. (Paragraphs 6.15 and 6.52);
Recommendations Contained in Panel Report: 17.2) The POB and SECPS
should review the results of implementing the Panel's recommendations
concerning the disciplinary process over a 2- to 3-year period to
determine their effectiveness. If the POB determines that these
recommendations have not satisfactory protected the public, the POB, in
cooperation with the SEC, should seek legislation to achieve the
protections necessary to the make the disciplinary process more
effective. (Paragraph 6.57);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): New membership requirement concerning disciplinary
procedures became effective for cases reported to the QCIC in 2001. The
QCIC, SECPS Executive Committee, and POB will continually monitor the
effectiveness of the requirement.
Recommendations Directed to: POB, SECPS, and SEC.
Findings From Panel Report: 17) The disciplinary system is perceived
to be slow and ineffective. (Paragraphs 6.15 and 6.52);
Recommendations Contained in Panel Report: 17.3) The POB should
leverage the knowledge it gains in its oversight of the disciplinary
process recommended by the Panel, to determine whether changes in
professional standards or further guidance is needed and communicate
these findings to the appropriate standard-setters or authoritative
bodies. (Paragraph 6.58);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The POB leverages knowledge it gains from its oversight of
PRC, QCIC, as well as its liaison with PEEC, through its Coordinating
Task Force. This task force will determine whether a need for changes
in professional standards has been or should be communicated to
standard-setters or other authoritative bodies, or the PITF if
appropriate.
Recommendations Directed to: POB.
Findings From Panel Report: 18) Some state boards have not been
effective in disciplining substandard conduct because of limited
budgets and the lack of effective means to investigate allegations and
impose discipline. (Paragraph 6.50);
Recommendations Contained in Panel Report: No recommendation made.
Findings From Panel Report: 19) The AICPA's Ethics Division cannot issue
subpoenas (has to rely on the cooperation of the individual being
investigated) or compel testimony (cannot talk to the plaintiff or
client company involved). (Paragraphs 6.11 and 6.51).
Findings From Panel Report: 20) The AICPA's Ethics Division
investigations and QCIC files are not privileged and are subject to
subpoena. (Paragraphs 6.48 and 6.54);
Recommendations Contained in Panel Report: No recommendation made.
Findings From Panel Report: 21) The AICPA's Ethics Division can impose
only limited sanctions. Their disciplinary authority extends only to a
CPAs membership rights in the AICPA or a state society of CPA's (state
boards are the only agencies that can revoke a CPA license).
(Paragraphs 6.6, 6.49, and 6.51);
Recommendations Contained in Panel Report: No recommendation made.
Findings From Panel Report: 22) The AICPA's Ethics Division's
disciplinary proceedings are not timely (they are deferred while
litigation or regulatory proceedings are in process). (Paragraphs 6.11,
6.51, and 6.52);
Recommendations Contained in Panel Report: 22.1) The Ethics Division
takes all necessary actions to ensure timely processing of
investigations involving audits of SEC registrants when the civil
litigation and public regulatory investigations have been concluded.
The Ethics Division should establish reasonable time frames for these
matters and report the status of all such matters to the POB
semiannually. (Paragraph 6.31);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The Ethics Division has received additional resources in
order to process investigations involving audits of SEC registrants in a
timely manner and has developed aggressive timelines to process the
cases once litigation or regulatory investigations have been concluded.
The PEEC has appointed a Statistical Reporting Task Force and a
Disciplinary Task Force with the objectives of improving statistical
reporting and making the information reported more descriptive and
informative. A representative of the POB attends the meetings of the
Statistical Reporting Task Force.
Recommendations Directed to: AICPA.
Findings From Panel Report: 23) The AICPA's Ethics Division's
proceedings are confidential, and thus the public cannot determine what
went wrong when a sanction is imposed, and in some cases whether a
sanction was imposed. Similarly, the QCIC's corrective actions it
imposes on firms are not made public. (Paragraph 6.51);
Recommendations Contained in Panel Report: No recommendation made.
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The PEEC has appointed a Statistical Reporting Task Force
and a Disciplinary Task Force with the objectives of improving
statistical reporting and making the information reported more
descriptive and informative. A representative of the POB attends the
Statistical Reporting Task Force meetings.
Findings From Panel Report: 24) The SEC has limited resources to pursue
cases against auditors. (Paragraphs 6.5 and 6.50);
Recommendations Contained in Panel Report: 24.1) The SEC should
allocate additional resources to its enforcement activities directed at
allegations of failed audits. (Paragraph 6.59);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): SEC officials stated that encouraging companies to engage
in cooperative measures such as self-policing prior to the discovery of
misconduct, self-reporting of misconduct when discovered, remediation,
and cooperating with law enforcement authorities will allow the SEC to
maximize the use of its enforcement staff and to concentrate on
bringing prompt corrective action in the most egregious cases.
Recommendations Directed to: SEC.
Findings From Panel Report: 24) The SEC has limited resources to pursue
cases against auditors. (Paragraphs 6.5 and 6.50);
Recommendations Contained in Panel Report: 24.2) The SEC should
periodically undertake similar studies (such as the study of AAERs in
Appendix F to the Panel's report) and disseminate the results.
(Paragraph 6.60);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The SEC does not plan to taken any additional actions to
implement this recommendation. While SEC officials stated that they
believe a continuing analysis of AAERs is important, they believe that
significant AAERs are currently being analyzed and digested on a real-
time basis by a number of organizations, including the press, the
accounting profession, accounting and auditing standard-setters,
academia, and others. The incremental benefits of an additional annual
or biennial study by SEC staff, therefore, may not be sufficient to
justify the resources it would take to complete such a study.
Recommendations Directed to: SEC.
Findings From Panel Report: 24) The SEC has limited resources to pursue
cases against auditors. (Paragraphs 6.5 and 6.50);
Recommendations Contained in Panel Report: 24.3) The SEC should document
information on the auditors' work in every enforcement investigation
involving materially misstated financial statements, not just those in
which the auditor is named in the AAER. (Paragraph 6.60);
Actions Taken as of September 2001 (as Reported by the POB, AICPA, SEC,
and NASBA): The SEC does not plan to taken any additional actions to
implement this recommendation. The SEC stated that its Division of
Enforcement has for many years reviewed the conduct of auditors in
essentially every investigation related to materially misstated
financial statements. When appropriate, the division recommends
enforcement or disciplinary action against an auditor. In circumstances
where the SEC concludes that a disciplinary action is not appropriate,
SEC officials stated that it is unclear to them what benefit accrues
from a public airing of the SEC’s determination.
Recommendations Directed to: SEC.
[End of table]
[End of section]
Appendix III: Comments From the Public Oversight Board:
Attachments A and B to this letter are not included in this report.
However, they are available on the Public Oversight Board’s web site
[hyperlink, http://www.publicoversightboard.org].
POB:
Public Oversight Board:
One Station Place:
Stamford, CT 06902:
(203) 353-5300:
Fax (203) 353-5311:
[hyperlink, http://www.publicoversightboard.org]
March 20, 2002:
Jeffrey C. Steinhoff:
Managing Director:
Financial Management and Assurance:
United States General Accounting Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Mr. Steinhoff:
I. Introduction:
Thank you for your letter dated March 1, 2002 requesting comments on
the draft report of the United States General Accounting Office ("GAO")
on the status of the Panel on Audit Effectiveness ("Panel")
recommendations to enhance the self-regulatory system of the accounting
profession ("Draft Report"). The Public Oversight Board ("POB")
appreciates the professionalism with which the members of the GAO staff
conducted their review in this matter, and believes that the Draft
Report provides useful information concerning the status of the Panel
recommendations.
In response to your March 1st letter, we set forth below a discussion
of the background here, a brief description of the POB's White Paper on
proposed legislation for a new private sector regulatory structure for
the accounting profession dated March 19, 2002 ("White Paper")
(Attachment A), and our general comments on the Draft Report. Specific
comments on the Draft Report from the POB staff are being prepared, and
will be forwarded to you before the close of this month.
II. Background:
To put the Panel recommendations in context, we note, as you do in the
Draft Report, that these recommendations were made by the Panel within
the framework of the existing regulatory system of the accounting
profession. The Panel's Report and Recommendations dated August 31,
2000 ("Panel Report") were directed at enhancing, not replacing, the
present regulatory system. The Panel Report did not propose or discuss
alternative models for regulation of the accounting profession (e.g.,
by legislation), or their relationship to the current financial
reporting model.
Recent events, including those surrounding the Enron collapse, have
very much changed the context in which the Panel issued its Report.
There is now a significant focus on replacing the present regulatory
system of the accounting profession with a different one. This has
been, and continues to be, the subject of Congressional hearings and
widespread media attention. In addition, several Congressmen and
Senators have introduced legislation to establish a new regulatory
system. In view of these events, as well as the obstacles the POB has
encountered in carrying out its oversight responsibilities under the
existing system, the POB has come to the conclusion that there is a
need for legislation to effectively deal with regulation of the
accounting profession. The POB's proposal for this legislation is
discussed in its White Paper. While we attach a copy of our White Paper
for your information, we believe that the summary of that Paper set
forth below will be helpful to you in connection with your Report on
the status of the Panel's recommendations.
III. POB White Paper:
The POB's White Paper, among other things, sets forth the POB's
observations about recent problems affecting the present regulatory
structure of the accounting profession, the POB's proposals for reform,
and a discussion of the POB's decision in January 2002 to terminate its
existence by March 31, 2002. This White Paper, and my prepared
statement (Attachment B), were submitted for the record of my testimony
before the Senate Committee on Banking, Housing, and Urban Affairs on
March 19, 2002.
As discussed in the attached White Paper, the POB recommends that
Congress create a new Independent Institute of Accountancy Board
("IIA") and place the new private sector regulation under its auspices.
The IIA would be run by a seven-member board totally independent of the
American Institute of Certified Public Accountants ("AICPA"), the Big
Five and other public accounting firms. The Chair and Vice Chair of the
IIA would serve on a full-time basis, and five other members would be
part-time. All would be appointed by a panel composed of the Chair of
the SEC, the Chair of the Federal Reserve Board, and the Secretary of
the Treasury. Once named, the Chair of the IIA would join these three
in selecting other members of the Board.
Important functions of the IIA would include:
* Exercise oversight for standard setting for accounting, auditing and
independence, and their interpretation.
* IIA employees would conduct comprehensive yearly reviews of the
annual internal inspections done by firms that audit more than 100
public corporations each year. Reviews of smaller audit firms would be
performed by other firms selected and paid by the IIA.
* IIA employees would conduct special reviews, when warranted.
* The Office of Enforcement and Discipline within the IIA would have
full authority to investigate allegations of wrongdoing by member CPA
firms and their personnel, and would be empowered to issue subpoenas
for testimony of persons and production of documents. The Office also
would be empowered to take appropriate disciplinary action after notice
and opportunity for public hearing.
* Funding for the new regulatory system would be provided through fees
imposed on public corporations in amounts sufficient to cover the cost
of the IIA.
* The IIA would be charged with coordinating international liaison and
oversight of continuing professional education.
IV. General Comments:
While you shall be furnished with specific comments by the POB staff on
your Draft Report by the close of this month, as I mentioned above, we
have two general comments on the Draft Report for your consideration.
These are set forth below.
A. First General Comment:
First, we believe it would be helpful to readers of the GAO's Report
for the Report to include, in addition to the Panel's recommendation
and the status of the action taken, an identification of any
differences between Panel recommendations and the actions, taken or
proposed, to implement those recommendations, with an explanation for
the differences and the estimated time to complete implementation.
For example, the Draft Report states in relevant part at pages 34 to
35:
In accordance with the Panel's recommendation, the SECPS [SEC Practice
Section] membership requirements were revised as follows when civil
litigation or a criminal or public regulatory investigation contains
allegations of an audit failure:
* The firm is required to conduct an internal review of the subject
engagement to evaluate the performance of the senior engagement
personnel.
* The QCIC [Quality Control Inquiry Committee] should conduct its usual
inquiry and the QCIC and the POB would jointly discuss the engagement.
If the QCIC believes that standards may have been violated and,
accordingly, refers the case to the Ethics Division of the AICPA, the
firm would be notified that the Ethics Division is deferring its
investigation pending the completion of the litigation.
* The firm is then required to take one of the following actions: (1)
terminate or retire the partner involved in the alleged audit failure,
(2) remove the partner from all public company audit engagements until
the Ethics Division's investigation is completed, or (3) perform an
additional second partner review of all public company audit
engagements completed by the partner in the 12 months prior to the
deferral, subject the partner to additional oversight on all public
company audit engagements for at least one year, and thereafter subject
the partner to those additional oversight procedures that the firm's
managing partner determines are necessary to protect the public based
on the firm's evaluation of the partner's performance.
The process implemented by the firms when they choose the third option
would be subject to peer review and POB oversight.
Appendix II to the Draft Report captioned, "Actions Responding to Panel
on Audit Effectiveness' Recommendations" at pages 84 to 87 of the Draft
Report sets forth, in a side-by-side columnar format, the relevant
Panel recommendation[Footnote 1] here and the SECPS membership
requirements intended to implement that recommendation.[Footnote 2]
When one reviews these two columns, it is apparent there are certain
differences between this Panel recommendation and SECPS membership
requirements that could be material to the public interest.
For example, with respect to a firm's selection of one of the three
specified options, the Panel recommendation states:
If the POB disagrees with a member firm's selection or method of
applying Option C, it should promptly make its views known to the firm,
SECPS committee representatives and the SEC through its normal
communication channels, and to the public through its Annual Report and
other publications.[Footnote 3]
In contrast, the SECPS membership requirements, which provide for a
more limited POB review, state, "The implementation of the option
selected [by the member firm] is subject to review in the member firm's
peer review and by the Public Oversight Board."[Footnote 4]
Accordingly, under the Panel's recommendation, it is expressly stated
that the POB could disagree with a member firm's selection of Option C.
In this event, the POB could take the position that, instead of being
allowed to participate in public company audit engagements under
additional oversight, the subject partner should be terminated, retired
or otherwise be removed from those engagements. The SECPS Executive
Committee, by not adopting this Panel recommendation as part of the
SECPS membership requirements, detracts from the weight to be given to
a POB disagreement with a firm's selection of Option C. This difference
could be material to the public interest.
B. Second General Comment:
Our second general comment is that we believe it would also be helpful
to readers of the GAO's Report for the Report to set forth the GAO's
evaluation of the reasonableness of any differences between the Panel
recommendations and the actions, taken or proposed, to implement those
recommendations.
For example, the Draft Report at page 30 states in relevant part:
Peer reviews are performed to enhance the public's confidence in
independent auditors. The Panel felt that the POB, as the public's
representative, should be viewed as the principal stakeholder in the
peer review process and accordingly recommended that it should be made
clear to peer reviewers that the POB, not the firm being reviewed, is
the primary client. The Panel wanted the peer reviewers to have the
"mind-set" that peer reviews are performed in the best interest of the
public, and not solely for the benefit of the reviewed firm. By
considering the POB as the primary client, the Panel hoped the peer
reviewers would likely bring the POB more into the process up front and
continue to keep them apprised of issues throughout the review. The POB
could then be in a better position to monitor and oversee the reporting
of peer review results.
The AICPA rejected the Panel's recommendation because the PRC, not the
POB, is responsible for maintaining and administering the peer review
program. The AICPA did adopt a related Peer Review Process Task Force
recommendation to address the peer review reports to both the PRC and
the reviewed firm. The Peer Review Process Task Force made this
recommendation because it felt that the PRC serves as an "audit
committee" and that by including the PRC as an addressee on the peer
review report would emphasize to peer reviewers and reviewed firms that
they should consider the PRC as the "audit committee." However, the
Panel told us that including the PRC as an addressee on the peer review
report does not satisfy the intent of its recommendation to have the
POB be the primary client of peer review.
The POB agrees with the Panel recommendation,[Footnote 5] as well as
with the Panel's position that the alternative approach of having the
Peer Review Committee as an addressee on the peer review report does
not satisfy this recommendation. Further, the POB believes that,
because the POB under its Charter has oversight responsibility for both
the Peer Review Committee and peer review program, it (or its
successor) is more like an "audit committee", and in a better position
to be the primary client of the peer review process, than the Peer
Review Committee. The Peer Review Committee, since it has
responsibility for maintaining and administering the peer review
program, and is subject to POB oversight, is more like "management"
than an "audit committee," and therefore should not be the primary
client of the peer review process.
V. Conclusion:
Again, the review conducted by your staff was professional and we
appreciate this opportunity to provide comments on the GAO Draft
Report.
Sincerely,
Signed by: Charles A. Bowsher:
cc: Mr. Robert W. Gramling:
Consultant:
United States General Accounting Office:
Mr. Michael C. Hrapsky:
Senior Project Manager:
United States General Accounting Office:
Footnotes:
[1] Section 6.56 of the Panel Report at 153-156.
[2] Section 1000.08(p) and Section 1000.47 (Appendix M) of the SEC
Practice Section Reference Manual ("SECPS Manual").
[3] Section 6.56 of the Panel Report at 155.
[4] Section 1000.47(.05) of the SECPS Manual.
[5] Section 6.40 of the Panel Report at 148.
[End of section]
Appendix IV: Comments From the American Institute of Certified Public
Accountants:
AICPA:
American Institute of Certified Public Accountants:
1211 Avenue of the Americas:
New York, NY 10036-8775:
(212) 596-6200:
fax (212) 596-6215:
[hyperlink, http://www.aicpa.org]
ISO 9001 Certified:
April 1, 2002:
Mr. Jeffrey C. Steinhoff:
Managing Director:
Financial Management and Assurance:
U.S. General Accounting Office:
441 G Street, NW:
Washington, DC 20548:
Dear Mr. Steinhoff:
The American Institute of Certified Public Accountants (AICPA)
appreciates the opportunity to review and comment on the U.S. General
Accounting Office's (GAO) draft report, The Accounting Profession:
Status of Panel on Audit Effectiveness Recommendations to Enhance the
Self-Regulatory System, dated March 2002.
We agree with the GAO findings and conclusions that most, if not
substantively all, of the Public Oversight Board (POB) Panel on Audit
Effectiveness' (the "Panel") recommendations addressed to the AICPA
have been adopted. The report accurately summarizes, in Appendix II,
the many actions the AICPA has taken with respect to the Panel's
recommendations as of September 2001. We understand the GAO has not
been requested to update the status of implementation of the
recommendations since September 2001 given more recent events (for
example, the announcement on January 17, 2002 by SEC Chairman Harvey
Pitt of a proposed new public regulatory system to oversee the
accounting profession, and the POB's decision to disband on or about
March 31, 2002). While we agree with the SEC's proposal, we disagree
with the POB's decision to disband, because we believe it is in the
public interest to continue our self-regulatory programs, with public
oversight, during the transition period to a new public regulatory
model. As a result, the AICPA and the SEC have agreed that the POB
staff will continue to oversee the profession's self-regulatory
activities for auditors of public companies; and the SEC will continue
its oversight as well.
We wish to emphasize the importance of the accuracy and clarity of the
information in the report. The following areas are very important as
Congress and regulators consider ideas while they deliberate on a new
public regulatory model that enhances the current model to provide for
the full protection of the investing public.
Coordination within the system of regulation of auditors of public
companies. We agree that the current system of federal, state and self-
regulation of auditors of public companies could and should be better
coordinated. Within the current self-regulatory element of this overall
system, the AICPA's efforts are well coordinated and appropriate
communications occur. However, we believe that a critical goal for a
new public regulatory body should be enhanced coordination among the
activities of the new regulatory body, the profession, and state and
federal regulators.
POB oversight over the independence standard setting and disciplinary
processes of the AICPA's ethics committee. The Panel's report
recommended POB oversight authority over the independence standard
setting process for auditors of public companies. Accordingly, the POB
charter provided the POB with oversight authority over the activities
of the Independence Standards Board (ISB), the primary independence
standard-setter, at the time, for auditors of public companies. With
the SEC's independence rulemaking effort in 2000. the SEC essentially
exercised its regulatory authority in the independence standard-setting
process and again became the primary independence standard-setter for
public company auditors. POB oversight over the ethics committee's
independence standard setting activities was unnecessary in these
circumstances, particularly in light of the significant participation
(versus oversight) on the ethics committee by five prominent public
sector individuals. We do not believe that the POB Panel ever suggested
POB oversight over the ethics committee's disciplinary function.
Rather, the Panel's recommendations focused on the disciplinary
activities of the Quality Control Inquiry Committee (QCIC). In fact, as
the recently approved POB charter was being drafted there were several
discussions about this very subject. As these discussions took place,
the profession and the POB both agreed that the POB Panel's
recommendations were meant to cover the ISB and QCIC.
POB budget cap. We do not disagree that a budget cap, adjusted annually
for inflation and including a provision to increase that cap if needed,
could be perceived as a lack of support for public oversight. However,
the AICPA has always supported independent public oversight with
fiscally accountable "no strings funding." The POB charter is perfectly
clear that the "POB shall have adequate no strings funding" and that
"...once the POB submits and consults on its annual budget...the EC
(SECPS Executive Committee) and the AICPA Board shall not withhold
funding for any reason." We also agree with the statement made on page
22 of the draft report that the existence of the cap would not impede
the POB's ability to operate in any way. We believe that any new public
regulatory body should be granted appropriate funding, subject to
reasonable and appropriate fiscal accountability.
Peer review report addressed to POB. The Panel recommended that peer
review reports be addressed to the POB rather than to the firm subject
to peer review. The AICPA's Peer Review Committee fully considered this
recommendation and concluded it would have no affect on the quality of
the peer review nor the content of peer review reports. It further
concluded that peer review reports would be more appropriately
addressed to the Peer Review Committee as the body responsible for
maintaining and administering the peer review program. The decision in
no way impacts the level of oversight necessary to adequately protect
the public interest.
Meeting Today's Challenges:
This is a time of exceptional challenges for all participants in the
financial reporting system. The AICPA is committed to meeting these
challenges and continues to serve the public interest by promoting
efforts to ensure that CPAs maintain integrity, objectivity, competence
and independence, and possess the skills needed in a complex business
and economic environment.
We commend the GAO staff's efforts in studying the actions taken to
improve the regulation of the profession, and believe the report will
be very helpful towards establishing a new regulatory model. Thank you
for the opportunity to review the report and provide our views.
Sincerely,
Signed by:
James G. Castellano, CPA:
AICPA Chairman:
cc: The Honorable David M. Walker, Comptroller General.
[End of section]
Appendix V: Comments From the National Association of State Boards of
Accountancy:
National Association of State Boards of Accountancy:
150 Fourth Avenue North, Suite 700:
Nashville, TN 37219-2417:
Tel 615/880-4200:
Fax 615/880-4290:
Web [hyperlink, http://www.nasba.org]
March 14, 2002:
Mr. Jeffrey C. Steinhoff:
Managing Director - Financial Management and Assurance:
United States General Accounting Office:
441 G Street, NW - Suite 5050:
Washington, DC 20548:
Dear Mr. Steinhoff:
Thank you for offering the National Association of State Boards of
Accountancy (NASBA) the opportunity to comment on the GAO's report to
Congressman John Dingell on the status of the recommendations made by
the Panel on Audit Effectiveness (the Panel). As pointed out in the
report's introduction, the resignation of the Public Oversight Board
(POB) as of March 31 and the many new proposals being offered by the
Securities and Exchange Commission (SEC) and Congress for the
regulation of the accounting profession, have left the Panel's
recommendations being only instructive for what may exist in the
future. The following remarks are directed to that future regulatory
scheme, rather than commenting on a system that may soon be abandoned
or greatly altered.
Unfortunately, while the Panel's report called for "improved
communications" with the state boards of accountancy, it made few
concrete suggestions on how this was to be achieved. During the Panel's
hearings, state board representatives had specifically called for (1)
the boards' involvement in rulemaking bodies for independence and other
ethical standards, and (2) direct prompt referrals to the boards of
individuals and firms associated with audit failures. Neither of these
suggestions was recommended by the Panel in its final report.
As correctly noted in the GAO's report, "...with regard to the public
regulatory systems, no substantial actions were taken to improve
communications." GAO was told by the POB that they "planned to begin a
dialog with NASBA and several state boards of accountancy to explore
ways to improve communication." NASBA and the boards would have
welcomed such dialog if it had ever been offered by the POB. It was
NASBA that initiated the development of a joint NASBA/AICPA Ethics Task
Force -- and it was the AICPA that withdrew from that task force.
It is frustrating to read that the GAO was advised by the Panel that
"they viewed disciplinary actions against SECPS members as primarily a
function of the SEC and the courts. The PEEC Chairman, who is part of
the AICPA's Ethics Division and responsible for investigating and
disciplining members of the AICPA concerning violations of standards,
stated that its cases involving SECPS members are a relatively small
percentage of its total cases and that having public members on the
PEEC adequately protects the public interest without POB oversight."
State boards operate on a complaint-driven system and, for protecting
the public interest, PEEC should directly make referrals to the boards.
The entire discussion of improving peer review as related in the GAO's
report fails to take into consideration a basic problem with the
system. Firms have voluntarily undergone peer review because they have
been told by the professional associations that its primary goal is
education. For peer review to be effective, it has to be more clearly
linked to the regulatory process. This would include forwarding to all
state boards modified or adverse peer review reports so that licenses
could be limited when appropriate, suspended or revoked. Firm
registration renewal in many states depends on having completed a peer
review; however, the results of those reviews, in most cases, are not
provided to the state boards.
The GAO's report notes: The Panel found that some state boards of
accountancy have not been effective in disciplining substandard conduct
due to limited budgets and the lack of effective means to investigate
allegations and impose disciplinary measures." Many state boards are
very effective in disciplining substandard conduct. For example, the
Texas State Board of Public Accountancy estimates it handles over 300
discipline cases per year and the North Carolina State Board of CPA
Examiners over 150. State accountancy boards are responsible for
approximately 577,000 licensees, while the American Institute of CPAs
estimates its membership at 350,000. Even the Panel identified more
than 50 firms that were auditing SEC registrants and were not members
of the AICPA -- but they were under the authority of the state boards.
Another flaw in the Panel's report is pointed out when the GAO
correctly notes: "...the Panel made various recommendations to improve
the disciplinary process to provide greater protection to the public
without recommending legislative changes necessary to provide
protective powers.... The Panel's recommendations were largely made to
components of the self-regulatory system, although some recommendations
were made to the SEC regarding resources and leveraging information
from its investigations. No recommendations were made to the state
boards of accountancy." Why not?
The GAO report picks up the Panel's conclusion that the AICPA's Ethics
Division's lack of protective power contributes to the length of time
the Division takes to complete its cases. The report states: "The lack
of protective power may also affect the Ethics Division's ability to
work cooperatively with the state boards of accountancy on
investigations. The Ethics Division has entered into cooperative
investigative agreements with four states that, with the member's
consent, allow it to conduct investigations and share the results with
the four state boards of accountancy [CT, IL, WV, RI]. The Ethics
Division stated it will attempt to expand this type of cooperative
agreement to other states but states previously have expressed little
interest in such an agreement." This cooperative program has been
available for more than ten years and has not been found acceptable to
most states' attorneys general. It should be noted the Connecticut
State Board of Accountancy has only used this cooperative service once
and has taken action against numerous licensees independent of it.
According to the GAO's report, the POB had formed a coordinating task
force "to leverage the knowledge it gains through oversight to
determine whether changes in professional standards or further guidance
is needed and communicate these findings to the appropriate standards
setter or authoritative bodies." While the SEC was invited to attend
the meetings, the state boards, that oversee all licensees and firms,
were not.
The GAO report repeats the Panel's recommendation: "...the self-
regulatory system must also have the necessary powers to timely and
effectively address alleged noncompliance with professional standards.
Ethics Division's investigations without protective powers will
continue to take years to complete after an allegation of an audit
failure is initially made through litigation and will perpetuate the
Panel's findings that the public's perception is that the self-
regulatory system is not timely or effective." Once a complaint is
filed with a state board and an investigation is started, the boards in
most states are bound to have a prompt resolution to the case. The
power to protect the public is in the hands of the state boards of
accountancy and can easily be set into motion with appropriate
communication from the professional self-regulatory system.
As correctly concluded by the GAO: "The POB, or its successor, the
Ethics Division, and the SEC also need to build effective working
relationships with the state boards of accountancy. The Panel reported
that although these parties have a common interest, they generally work
separately and information is not freely shared, which contributes to
the public perception that the discipline function of the accounting
profession is not timely or effective." The state boards' attorneys
have for several years been encouraging the SEC to allow them to share
case information before a settlement agreement is reached and the
materials become unavailable. For the boards, the protection of the
public is the primary goal, but they do afford due process to all
licensees and they do have strict rules about confidentiality of
materials.
Certainly there is a place for self-regulation, but for the public to
have confidence in the profession, the SEC's and state boards'
essential positions in the regulatory scheme need to be properly
recognized and supported.
Sincerely,
Signed by:
Barton W. Baldwin, CPA:
Chair, NASBA:
Signed by:
David A. Costello, CPA:
President and CEO, NASBA:
Signed by:
Thomas J. Sadler, CPA:
Chair, NASBA Litigation Response and Assistance Committee:
[End of section]
Appendix VI: Accounting Profession: Oversight, Auditor Independence,
and Financial Reporting Issues:
United States General Accounting Office:
Comptroller General of the United States:
Washington, DC 20548:
May 3, 2002:
The Honorable Paul S. Sarbanes:
Chairman:
Committee on Banking, Housing, and Urban Affairs:
United States Senate:
Subject: Accounting Profession: Oversight, Auditor Independence, and
Financial Reporting Issues:
Dear Mr. Chairman:
This letter responds to your recent request that we provide our views
regarding what steps the Congress should consider taking to strengthen
oversight of the accounting profession, auditor independence, and
selected financial reporting matters. The sudden and largely unexpected
bankruptcy of the Enron Corporation (Enron) and other large
corporations’ financial reporting restatements have raised questions
about the soundness of the current self-regulatory and financial
reporting systems and resulted in substantial losses to employees,
shareholders, and other investors. These events have also raised a
range of questions regarding how such dramatic and unexpected events
can happen and the role and capacities of various key players under the
existing systems.
The issues surrounding the accounting profession’s current self-
regulatory system for auditors involves many players in a fragmented
system that is not well coordinated, involves certain conflicts of
interest, lacks effective communication, has a funding mechanism that
is dependent upon voluntary contributions from the accounting
profession, and has a discipline system that is largely perceived as
being ineffective. (Enclosure 1 serves to illustrate the complexity of
the current system of regulation and oversight and the stakeholders who
rely on the system.)
Simply stated, the current self-regulatory system is broken and
oversight of the self-regulatory system by the Securities and Exchange
Commission (SEC) has not been effective in addressing these issues to
adequately protect the public interest. As a result, given the
important role that independent auditors play and various inherent
problems in the current self-regulatory system, direct government
intervention is needed to statutorily create a new body to oversee the
accounting profession’s responsibilities for auditing public companies.
This step is necessary in order to increase the effectiveness of the
audit process and to rebuild public confidence. The new body should be
independent of the accounting profession, have significant standards-
setting, oversight, and disciplinary authority, be adequately resourced
to fulfill its responsibilities, and have sufficient operating
flexibility to attract and retain quality leadership and supporting
staff.
On the other hand, the concerns relating to the timeliness, relevancy
and transparency of the financial reporting model may be best addressed
through the SEC working more closely with the Financial Accounting
Standards Board (FASB), assuring that the FASB has an adequate and
independent source of funding for its operations, and reporting
periodically to the Congress in connection with certain FASB matters.
If such an approach is not successful in achieving the expected
improvements in the financial reporting model in a timely and effective
manner, the government can then take further action.
The areas of oversight of the accounting profession, auditor
independence, and financial reporting are important on their own, but
they also represent interrelated keystones to protecting the public’s
interest. Failure in any of these areas can place a strain on the
entire system. Consequently, potential actions should be guided by the
fundamental principles of having the right incentives for the key
parties to do the right thing, adequate transparency to provide
reasonable assurance that the right thing will be done, and full
accountability if the right thing is not done. These three fundamental
principles represent a system of controls that should operate in
conjunction with a policy of placing special attention on areas of
greatest risk.
New Body Needed To Regulate And Oversee The Accounting Profession:
Enron’s failure and a variety of other recent events have brought a
direct focus on the ineffectiveness of the current system of regulation
and oversight of the accounting profession. Independent auditors have a
key role to play in protecting shareholders and the public’s interest
in our capital market system. They hold a public trust and their
actions or inactions can have significant implications on investors,
creditors and other users of financial reports. In this regard,
auditors must place additional emphasis on whether financial statements
are “fairly presented in all material respects” in addition to their
traditional emphasis on whether such financial statements are prepared “
in accordance with generally accepted accounting principles.” Fair
presentation requires providing reasonable assurance that major value
and risk elements are appropriately reflected in the financial
statements and related notes in an understandable fashion. It also
requires employing an “economic substance” versus “transaction form”
approach to important accounting and reporting issues.
Many proposals are before the Congress to establish a new body to
regulate and/or oversee accounting firms that audit public companies.
In our view, the Congress should consider the following key factors or
criteria in establishing this new body, each of which is critical to
its likely effectiveness.
Functions of the New Body:
The new body should have direct responsibility and authority for
certain critical functions in connection with public accounting firms
and their members who audit public companies. These include:
* establishing professional standards (independence standards; quality
control standards, auditing standards, and attestation standards). The
new body should be authorized to issue professional standards. In that
respect, the new body should also be authorized to affirmatively adopt,
at its discretion, professional standards, in whole or in part,
promulgated by another standard-setting body. In the area of new
standards, the new body may choose to require auditor reporting on the
effectiveness of internal control over financial reporting in
connection with audits of public companies, which is currently not
required under existing auditing standards. It may also decide not to
affirmatively adopt a standard developed by another standard-setting
body but instead issue a modified version of the standard.
* monitoring public accounting firms for compliance with applicable
professional standards. For efficiency, except for quality reviews of
the largest firms and those firms in which the nature of the audits
they perform pose a higher level of risk as determined by the new body,
the new body should be authorized to use contractors or accounting
firms to perform quality reviews in accordance with standards and
processes set by the new body. However, the new body should have final
approval authority in connection with any quality review engagements
performed by any contractors or accounting firms.
* investigating and disciplining public accounting firms and/or
individual auditors of public accounting firms who do not comply with
applicable professional standards. Investigations and disciplinary
actions of the new body should be in addition to existing investigatory
and disciplinary authority that already exists with the SEC and state
boards of accountancy.
* establishing various auditor rotation requirements for key public
company audit engagement personnel (i.e., primary and second partners,
and engagement managers). Related to this function, we believe the new
body should undertake a study and report to the Congress on the pros
and cons of any mandatory rotation of accounting firms that audit
public companies before taking any action with regard to establishing
requirements for any mandatory rotation of accounting firms.
Funding for the New Body:
The new body should have independent sources of funding by virtue of
mandatory, not voluntary, payments. Public accounting firms and audit
partners that audit financial statements, reports, or other documents
of public companies that are required to be filed with the SEC should
be required to register with the new body. The new body should have the
authority to set annual registration fees and fees for services such as
peer reviews of public accounting firms. The fees should be set to
recover full costs and sustain the operations of the new body.
Reporting Requirement of the New Body and GAO Access to Records:
The new body should report annually to the Congress and the public on
the full range of its activities, including coordination with other
standard-setting bodies whose standards it so chooses to adopt, setting
professional standards, peer reviews of public accounting firms, and
related disciplinary activities. Such reporting also provides the
opportunity for the Congress to conduct oversight of the performance of
the new body. The Congress also may wish to have GAO review and report
on the performance of the new body after the first year of its
operations and periodically thereafter. Accordingly, we suggest that
the Congress provide GAO not only access to the records of the new
body, but also access to the records of other entities that the new
body has chosen to rely on, such as other standard-setting bodies, and
contractors or public accounting firms that conduct quality reviews, to
the extent GAO considers necessary to assess the performance of the new
body.
Structure of the New Body:
The new body should be created by statute and should be independent of
the accounting profession. To facilitate operating independently, the
new body’s board members should be highly qualified and should have
authority to set and approve its operating rules. The new body should
have independent decision-making authority; however, it should
coordinate and communicate its activities with other parties such as
the SEC, the various state boards of accountancy, other standard-
setters, and GAO, as appropriate. The new body should set its own human
resource and other administrative requirements and should be given
appropriate flexibility to provide compensation that is competitive to
attract highly competent board members and supporting staff. The new
body should also have adequate staff to effectively discharge its
responsibilities.
Candidates for the new body’s board membership could be identified
through a nominating committee that could include the Chairman of the
Federal Reserve, Chairman of the SEC, the Secretary of the Treasury,
and the Comptroller General of the United States. This approach would
help to assure the qualifications and independence of all board
members.
The number of board members could be 5 or 7 and have stated terms, such
as 5 years with a limited renewal option, and the members’ initial
terms should be staggered to ensure some continuity. Ideally, the
members of the board should be presidential appointees who are
confirmed by the Senate (PASs). However, if the board members are not
PASs, the board should be actively overseen by and accountable to a
body that is composed of PASs, such as the SEC, in order to assure
adequate accountability to the Congress and the public. At a minimum,
the chair and vice-chair should serve on a full-time basis. None of the
board members should be active accounting profession practitioners, and
a majority of board members should not have been accounting profession
practitioners within the recent past (e.g., 3 years).
There are several alternative structures that the Congress could choose
from in establishing the new body, including creating (1) a new unit
within the SEC, (2) an independent government entity within the SEC,
(3) an independent government agency outside the SEC, or (4) a non-
governmental private-sector entity overseen by the SEC. Each of the
above alternative structures have various pros and cons that should be
considered in order to assure the credibility and effectiveness of the
new body in protecting the public interest. We believe that each of the
alternative structures provides an organizational foundation for
managing and operating the new body that potentially is workable. For
the following reasons, we favor alternatives two and three and believe
they have a greater likelihood of success.
Under alternatives one and four, the new body’s functions (e.g.,
establishing professional standards, monitoring, and discipline) would
be subject to SEC approval in order to assure that all actions are in
the public’s interest and appropriate accountability to the Congress
and the public. This, however, would increase the SEC’s responsibility
as well as its workload, for the agency and the Commissioners, both of
which are already overloaded. Also, under alternatives one and four the
new body’s board members would not likely be PASs since under
alternative one the SEC Chair and other Commissioners are PASs, and
since alternative four involves a non-governmental entity. Therefore,
under alternatives one and four, the new body would have less direct
accountability to the Congress and the public than a body with board
members who are PASs. This limitation could be mitigated to some extent
by ensuring that regardless of the structure of the new body that board
members are selected from candidates provided by an independent and
appropriately qualified nominating committee as previously discussed.
Although a structure that provides direct accountability to the
Congress and the public is important in our view, a more critical
question regarding the structure of alternatives one and four is
whether the SEC has the capacity to effectively take on such an
additional workload. Clearly, the SEC has the culture and potential to
perform an active oversight role and this would be in line with its
current mission. But, does it realistically have the capacity to do so?
From a historical perspective, while the SEC has had authority for over
70 years to regulate the public accounting profession under the federal
securities laws and regulations related to public companies, it has
largely relied on the public accounting profession to regulate itself.
It is now apparent that this model has not adequately protected the
public’s interest. Therefore, the SEC would need to institute a new
function within its organization, as called for in alternative one, or
a new oversight structure for a private-sector entity outside the SEC,
as called for in alternative four, both of which would require
additional resources and a significant increase in priority to more
directly regulate the accounting profession at a time when the SEC is
already facing a range of challenges in fulfilling its current
responsibilities. Further, we believe that the SEC also needs to
increase the amount of time and attention that it allocates to
interacting with the FASB, the stock exchanges, and the investment
banking/analyst community.
As we recently reported,[Footnote 1] the SEC’s ability to fulfill its
mission has become increasingly strained due, in part, to significant
imbalances between the SEC’s workload (such as filings, complaints,
inquiries, investigations, examinations, and inspections) and staff
resources. Although additional resources could help the SEC do more,
additional resources alone would not help the SEC address its high
staff turnover, which continues to be a major challenge for the agency.
About 40 percent of the SEC’s staff left the agency between 1998 and
2001 and, as a result, the average level of experience at the SEC has
been declining. For example, in 2000, 76 percent of the SEC’s examiners
had been with the agency less than 3 years. However, we also reported
that the SEC has not made effective use of strategic planning and
information technology to leverage its limited resources. In addition
to putting more strain on the SEC’s capacity, alternatives one and four
would also likely be less efficient models for the new body to operate
under by requiring additional time and attention from the SEC.
Alternative two, which calls for the creation of an independent
government entity within the SEC, and alternative three, which calls
for the creation of an independent government agency outside the SEC,
do not pose the same capacity challenges for the SEC, especially at the
Commissioner level, as alternatives one and four. Also, alternatives
two and three both meet each of the critical factors outlined above for
the structure of the new body. We recognize there may be concern over
adding more political appointments that have to be Senate confirmed, as
called for under alternatives two and three, given the recent
challenges of filling positions that are PASs. However, having an
independent entity overseen by PASs serves to significantly enhance the
entity’s accountability to the Congress and the public.
Of these two alternatives, we favor alternative two as having a greater
likelihood of success because the new body would be housed within the
SEC and, therefore, could receive administrative support from the SEC,
including human resources, payroll, and other administrative support.
More importantly, this alternative should better facilitate
communication and provide for maximum coordination with the SEC, while
also allowing the new body the independence to design its own policies
and procedures and systems as it deemed appropriate. In addition,
alternative two would not require the Congress to create a separate
federal entity. Alternative two would also facilitate a consolidation
of the new entity under the SEC in future years if such a consolidation
was deemed to be both desirable and appropriate. Therefore, we believe
that alternative two has the greatest likelihood of success in terms of
potential effectiveness, efficiency, and accountability of the new
body. However, as previously stated, each of the alternative structures
has merit and can potentially work if properly designed and
implemented.
Auditor Independence:
For over 70 years, the public accounting profession, through its
independent audit function, has played a critical role in enhancing a
financial reporting process that has supported the effective
functioning of our domestic capital markets, which are widely viewed as
the best in the world. The public’s confidence in the reliability of
issuers’ financial statements, which relies in large part on the role
of independent auditors, serves to encourage investment in securities
issued by public companies. This sense of confidence depends on
reasonable investors perceiving auditors as independent expert
professionals who have neither mutual, nor conflicts of, interests in
connection with the entities they are auditing. Accordingly, investors
and other users expect auditors to bring to the financial reporting
process integrity, independence, objectivity, and technical competence,
and to prevent the issuance of misleading financial statements.
Enron’s failure and certain other recent events have raised questions
concerning whether auditors are living up to the expectations of the
investing public; however, similar questions have been raised over a
number of years due to significant restatements of financial statements
and certain unexpected and costly business failures, such as the
savings and loan crisis. Issues debated over the years continue to
focus on auditor independence concerns and the auditor’s role and
responsibilities. Public accounting firms providing nonaudit services
to their audit client is one of the issues that has again surfaced by
Enron’s failure and the large amount of annual fees collected by
Enron’s independent auditor for nonaudit services.
Auditors have the capability of performing a range of valuable services
for their clients, and providing certain nonaudit services can
ultimately be beneficial to investors and other interested parties.
However, in some circumstances, it is not appropriate for auditors to
perform both audit and certain nonaudit services for the same client.
In these circumstances, the auditor, the client, or both will have to
make a choice as to which of these services the auditor will provide.
These concepts, which we strongly believe are in the public’s interest,
are reflected in the revisions to auditor independence requirements for
government audits,[Footnote 2] which GAO recently issued as part of
Government Auditing Standards.[Footnote 3] The new independence
standard has gone through an extensive deliberative process over
several years, including extensive public comments and input from my
Advisory Council on Government Auditing Standards.[Footnote 4] The
standard, among other things, toughens the rules associated with
providing nonaudit services and includes a principle-based approach to
addressing this issue, supplemented with certain safeguards. The two
overarching principles in the standard for nonaudit services are that:
* auditors should not perform management functions or make management
decisions, and;
* auditors should not audit their own work or provide nonaudit services
in situations where the amounts or services involved are significant or
material to the subject matter of the audit.
Both of the above principles should be applied using a substance over
form doctrine. Under the revised standard, auditors are allowed to
perform certain nonaudit services provided the services do not violate
the above principles; however, in most circumstances certain additional
safeguards would have to be met. For example, (1) personnel who perform
allowable nonaudit services would be precluded from performing any
related audit work, (2) the auditor’s work could not be reduced beyond
the level that would be appropriate if the nonaudit work were performed
by another unrelated party, and (3) certain documentation and quality
assurance requirements must be met. The new standard includes an
express prohibition regarding auditors providing certain bookkeeping or
record keeping services and limits payroll processing and certain other
services, all of which are presently permitted under current
independence rules of the AICPA. However, our new standard allows the
auditor to provide routine advice and technical assistance on an
ongoing basis and without being subject to the additional safeguards.
The focus of these changes to the government auditing standards is to
better serve the public interest and to maintain a high degree of
integrity, objectivity, and independence for audits of government
entities and entities that receive federal funding. However, these
standards apply only to audits of federal entities and those
organizations receiving federal funds, and not to audits of public
companies. In the transmittal letter issuing the new independence
standard, we expressed our hope that the AICPA would raise its
independence standards to those contained in this new standard in order
to eliminate any inconsistency between this standard and their current
standards. The AICPA’s recent statement before another congressional
committee that the AICPA will not oppose prohibitions on auditors
providing certain nonaudit services seems to be a step in the right
direction.[Footnote 5]
The independence of public accountants is crucial to the credibility of
financial reporting and, in turn, the capital formation process.
Auditor independence standards require that the audit organization and
the auditor be independent both in fact and in appearance. These
standards place responsibility on the auditor and the audit
organization to maintain independence so that opinions, conclusions,
judgments, and recommendations will be impartial and will be viewed as
being impartial by knowledgeable third parties. Because independence
standards are fundamental to the independent audit function, as part of
its mission, the new statutorily created body, which we previously
discussed, should be responsible for setting independence standards for
audits of public companies, as well as have the authority to discipline
members of the accounting profession that violate such standards.
Financial Reporting:
Business financial reporting is critical in promoting an effective
allocation of capital among companies. Financial statements, which are
at the center of present-day business reporting, must be timely,
relevant, and reliable to be useful for decision-making. In our 1996
report on the accounting profession,[Footnote 6] we reported that the
current financial reporting model does not fully meet users’ needs.
More recently, we have noted that the current reporting model is not
well suited to identify and report on key value and risk elements
inherent in our 21st Century knowledge-based economy. The SEC is the
primary federal agency currently involved in accounting and auditing
requirements for publicly traded companies but has traditionally relied
on the private sector for setting standards for financial reporting and
independent audits, retaining a largely oversight role. Accordingly,
the SEC has accepted rules set by the FASB—generally accepted
accounting principles (GAAP)—as the primary standard for preparation of
financial statements in the private sector.
We found that despite the continuing efforts of FASB and the SEC to
enhance financial reporting, changes in the business environment, such
as the growth in information technology, new types of relationships
between companies, and the increasing use of complex business
transactions and financial instruments, constantly threaten the
relevance of financial statements and pose a formidable challenge for
standard setters. A basic limitation of the model is that financial
statements present the business entity’s financial position and results
of its operations largely on the basis of historical costs, which do
not fully meet the broad range of user needs for financial
information.[Footnote 7] Enron’s failure and the inquiries that have
followed have raised many of the same issues about the adequacy of the
current financial reporting model, such as the need for additional
transparency, clarity, more timely information, and risk-oriented
financial reporting.
Among other actions to address the Enron-specific accounting issues,
the SEC has requested that the FASB address the specific accounting
rules related to Enron’s special purpose entities and related party
disclosures. In addition, the SEC Chief Accountant has also raised
concerns that the current standard-setting process is too cumbersome
and slow and that much of the FASB’s guidance is rule-based and too
complex. He believes that (1) a principle-based standards will yield a
less complex financial reporting paradigm that is more responsive to
emerging issues, (2) the FASB needs to be more responsive to accounting
standards problems identified by the SEC, and (3) the SEC needs to give
the FASB freedom to address the problems, but the SEC needs to monitor
projects on an ongoing basis and, if they are languishing, determine
why.
We generally agree with the SEC Chief Accountant’s assessment. We also
believe that the issues surrounding the financial reporting model can
be effectively addressed by the SEC, in conjunction with the FASB,
without statutorily changing the standard-setting process. However, we
do believe that a more active and ongoing interaction between the SEC
and the FASB is needed to facilitate a mutual understanding of
priorities for standard-setting, realistic goals for achieving
expectations, and timely actions to address issues that arise when
expectations are not likely to be met. In that regard, the SEC could be
directed to:
* reach agreement with the FASB on its standard-setting agenda,
approach to resolving accounting issues, and timing for completion of
projects;
* monitor the FASB’s progress on projects, including taking appropriate
actions to resolve issues when projects are not meeting expectations;
and
* report annually to the Congress on the FASB’s progress in setting
standards, along with any recommendations, and the FASB’s response to
the SEC’s recommendations.
The Congress may wish to have GAO evaluate and report to it one year
after enactment of legislation and periodically thereafter on the SEC’s
performance in working with the FASB to improve the timeliness and
effectiveness of the accounting standard-setting process. Accordingly,
we suggest that the Congress provide GAO access to the records of the
FASB that GAO considers necessary for it to evaluate the SEC’s
performance in working with the FASB.
The FASB receives about two-thirds of its funding from the sale of
publications with the remainder of its funding coming voluntarily from
the accounting profession, industry sources, and others. One of the
responsibilities of the FASB’s parent organization, the Financial
Accounting Foundation, is to raise funds for the FASB and its standard-
setting process to supplement the funding that comes from the FASB’s
sale of publications. Some have questioned whether this is the best
arrangement to ensure the independence of the standard-setting process.
This issue has been raised by the appropriateness of certain accounting
standards related to consolidations, that the FASB has been working on
for some time, applicable to Enron’s restatement of its financial
statements as reported to the SEC by Enron in its November 8, 2001,
Form 8-K filing. However, the issue has previously been raised when the
FASB has addressed other controversial accounting issues, such as
accounting for stock options. We believe that the FASB should have
mandatory sources of funding to remove the appearance of any
independence issues related to funding FASB. Therefore, the Congress
may wish to task the SEC with studying this issue and identifying
alternative sources of mandatory funding to supplement the FASB’s sale
of publications, including the possibility of imposing fees on
registrants and/or firms, and to report to the Congress on its findings
and actions taken to address the funding issue.
Closing Comments:
The United States has the largest and most respected capital markets in
the world. Our capital markets have long enjoyed a reputation of
integrity that promotes investor confidence. This is critical to our
economy and the economies of other nations given the globalization of
commerce. However, this long-standing reputation is now being
challenged by some parties. The effectiveness of systems relating to
independent audits and financial reporting which represent key
underpinnings of capital markets and are critical to protecting the
public’s interest, has been called into question by the failure of
Enron and certain other events and practices. Although the human
elements can override any system of controls, it is clear that there
are a range of actions that are critical to the effective functioning
of the system underlying capital markets that require attention. In
addition, a strong enforcement function with appropriate civil and
criminal sanctions is also needed to ensure effective accountability
when key players fail to properly perform their duties and
responsibilities.
The accounting profession’s self-regulatory system has not effectively
fulfilled its responsibilities. In addition, the current model whereby
the SEC oversees various self-regulatory organizations in connection
with financial reporting and auditing has not worked well, especially
in connection with audits of public companies. Further, the SEC is not
staffed to take on a more direct role in regulating the accounting
profession nor has the SEC strategically managed its limited resources
well. Therefore, we strongly believe that a new independent body,
created by statute to regulate audits of public companies, is needed in
order to better protect the public’s interest. However, currently we do
not believe that it is necessary or appropriate for the government to
assume direct responsibility for financial reporting. We do, however,
believe that the Congress should provide the SEC with direction to
address the issues concerning financial reporting as we have previously
discussed.
In summary, Enron’s recent sudden collapse, coupled with other recent
business failures and certain other activities, pose a range of serious
issues concerning the accounting profession and financial reporting
that should be addressed. The fundamental principles of having the
right incentives, adequate transparency, and full accountability
provide a good sounding board to evaluate proposals that are advanced.
In the end, no matter what improvements are made to strengthen the
oversight and independence of the accounting profession and enhance the
relevancy and transparency of financial reporting, bad actors will do
bad things with bad results. We must, however, strive to take steps to
minimize the number of such situations and to hold any violators of the
system fully accountable for their actions.
We would be pleased to meet with you or other members of the committee
to answer any questions that you may have or to provide further
assistance.
Sincerely yours,
Signed by:
David M. Walker:
Comptroller General of the United States:
Enclosure: Illustration of interactions between all aspects of
regulatory entities.
Footnotes:
[1] SEC Operations: Increased Workload Creates Challenges, (GAO-02-302,
March 5, 2002).
[2] Government Auditing Standards: Amendment No. 3, Independence (GAO-
02-388G, January 2002).
[3] Government Auditing Standards was first published in 1972 and is
commonly referred to as the “Yellow Book,” and covers federal entities
and those organizations receiving federal funds. Various laws require
compliance with the standards in connection with audits of federal
entities and funds. Furthermore, many states and local governments and
other entities, both domestically and internationally, have voluntarily
adopted these standards.
[4] The Advisory Council includes 20 experts in financial and
performance auditing and reporting drawn from all levels of government,
academia, private enterprise, and public accounting, who advise the
Comptroller General on Government Auditing Standards.
[5] Testimony of AICPA Chairman before the House Energy and Commerce
Committee (Subcommittee on Communications, Trade and Consumer
Protection), February 14, 2002.
[6] The Accounting Profession: Major Issues: Progress and Concerns
(GAO/AIMD-96-98, September 24, 1996).
[7] The accounting and reporting model under generally accepted
accounting principles is actually a mixed-attribute model. Although
most transactions and balances are measured on the basis of historical
cost, which is the amount of cash or its equivalent originally paid to
acquire an asset, certain assets and liabilities are reported at
current values either in the financial statements or related notes. For
example, certain investments in debt and equity securities are
currently reported at fair value, receivables are reported at net
realizable value, and inventories are reported at the lower of cost or
market value. Further, certain industries such as brokerage houses and
mutual funds prepare financial statements on a fair value basis.
[End of section]
Footnotes (from main body of the document):
[1] The Panel on Audit Effectiveness Report and Recommendations, August
31, 2000.
[2] Subsequently, on March 21, 2002, the Chairman of the SEC in his
statement before the Senate Committee on Banking, Housing, and Urban
Affairs provided additional details in a working proposal for creating
a new private-sector, independent body, subject to SEC oversight, to
regulate the accounting profession in the areas of quality control
reviews and disciplinary powers.
[3] While the SEC proposal, including the lack of consultation with the
POB on the proposal, was the precipitating factor in the decision of
the POB to terminate its existence, other considerations played a role,
as discussed in the POB Chairman’s statement before the Senate
Committee on Banking, Housing, and Urban Affairs on March 19, 2002.
[4] The Transition Oversight Staff will carry out the work of the
former POB through a memorandum of understanding signed by Transition
Oversight Staff, the SEC, the AICPA, and the AICPA’s SEC Practice
Section.
[5] This date was subsequently extended by 1 day to May 1, 2002.
[6] Highlights of GAO’s Forum on Corporate Governance, Transparency,
and Accountability [hyperlink, http://www.gao.gov/products/GAO-02-
494SP, March 5, 2002].
[7] Protecting the Public Interest: Selected Governance, Regulatory
Oversight, Auditing, Accounting, and Financial Reporting Issues
[hyperlink, http://www.gao.gov/products/GAO-02-483T], March 5, 2002,
and Protecting the Public’s Interest: Considerations for Addressing
Selected Regulatory Oversight, Auditing, Corporate Governance, and
Financial Reporting Issues [hyperlink,
http://www.gao.gov/products/GAO-02-601T], April 9, 2002.
[8] Government Auditing Standards: Amendment No.3, Independence
[hyperlink, http://www.gao.gov/products/GAO-02-388G], January 2002.
[9] The Panel on Audit Effectiveness was chaired by a former Chair of
Price Waterhouse and included two former SEC Commissioners, a former
Chairman and CEO of the American Stock Exchange, a former President of
the American Stock Exchange, a Chair and CEO of CNA Insurance
Companies, a professor of finance and law at Columbia University, and a
professor of auditing at the University of Southern California.
[10] Robert K. Mautz, “Self-Regulation: Perils and Problems,” Journal
of Accountancy (May 1983) (initially presented as an address at the
AICPA’s tenth national conference on current SEC developments [January
1983]).
[11] FASB, as part of the Financial Accounting Foundation (FAF), is a
not-for-profit organization supported by proceeds from the sale of its
publications and by contributions from accounting firms, corporations,
and other entities that are interested in accounting issues. FASB
consists of seven full-time members who are selected and approved by the
FAF.
[12] Initially membership in the SECPS was voluntary. In 1988, the
AICPA changed its by-laws to mandate that members of the AICPA who
provide attest services to SEC clients be affiliated with a CPA firm
that is an SECPS member. There are about 1,300 member firms in the
SECPS that collectively audit more than 99 percent of all U.S.-based
SEC registrants.
[13] The POB charter provides that the $5.2 million limit does not
include expenditures by the POB for the reviews of the Big 5 firms
conducted pursuant to the “Term Sheet for Independence Look-Back
Testing Program” entered into by the SEC and those firms in June
2000.
[14] As discussed previously, the POB ultimately extended its existence
solely for administrative purposes through May 1, 2002.
[15] The Peer Review Process Task Force’s report, which was issued in
January 2000, is included in Exhibit 4 of the Panel’s report, The Panel
on Audit Effectiveness Report and Recommendations, August 31, 2000.
[16] Large firms are defined as those firms with 30 or more SEC clients
and at least 100 accounting and auditing professionals.
[17] The AICPA’s ASB issues quality control standards that provide that
firms have a system of quality control for their accounting and
auditing practice and broadly describes elements of quality control and
other matters essential to the effective design, implementation, and
maintenance of the system.
[18] Guide for Establishing and Maintaining a System of Quality Control
for CPA Firm’s Accounting and Auditing Practice.
[19] Standards for Performing and Reporting on Peer Reviews.
[20] NASBA officials stated that in some cases where a violation is
obvious, state boards are able to get the practitioner to surrender
his/her license or to agree to a monitoring agreement while the AICPA
or the SEC investigation proceeds.
[21] Statement of the Honorable Charles A. Bowsher, Chairman, Public
Oversight Board, Before the Senate Banking Committee (March 19, 2002).
[22] Technically, the Panel report contained a recommendation that the
POB be the primary client of the peer review.
[End of section]
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